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18 Aug 2005
MOODY'S DOWNGRADES ABITIBI-CONSOLIDATED'S SPEC GRADE LIQUIDITY RATING TO SGL-4 WHILE AFFIRMING THE COMPANY'S Ba3 DEBT RATINGS; OUTLOOK REMAINS NEGATIVE
Approximately US$3.8 Billion of Debt Securities Affected
Toronto, August 18, 2005 -- Moody's Investors Service ("Moody's") downgraded Abitibi-Consolidated
Inc.'s ("Abitibi") Speculative-Grade Liquidity
("SGL") rating to SGL-4, indicating weak liquidity,
from SGL-3, indicating adequate liquidity. Abitibi's
debt is rated Ba3 and the outlook is negative. The rating action
was prompted by the fact Abitibi's key credit facility matures inside
of the next four quarters, in June of 2006. While it is expected
that the facility's maturity date will be extended, when considered
in combination with the fact the company's Accounts Receivable securitization
program is not committed, and the company is not likely to generate
sufficient cash flow over the next four quarters to replace the external
funding were it required, Moody's SGL methodology characterizes
the situation as evidencing weak liquidity. In addition,
the SGL rating continues to reflect Abitibi's recent trend of weak-to-negative
free cash flow together with uncertainties concerning the magnitude,
sustainability and impact of the commodity price recovery. It should
be noted that SGL ratings are inherently more volatile than long-term
debt ratings. Whereas Moody's attempts to ensure that long-term
debt ratings are valid on a "through-the-cycle"
basis, SGL ratings are expected to change far more frequently.
Given that Abitibi's revolving bank credit facility matures in June
of 2006, and given Moody's SGL methodology and practice of
reviewing SGL ratings on a quarterly basis, in the event the credit
facility's maturity is extended, it is likely the SGL rating
will be revised upwards.
Speculative Grade Liquidity Rating: to SGL-4 from SGL-3
Corporate Family: Ba3
Senior Unsecured: Ba3
Senior Unsecured Shelf Registration: (P)Ba3
Abitibi-Consolidated Company of Canada
Bkd Senior Unsecured: Ba3
Senior Unsecured Shelf Registration: (P)Ba3
Abitibi-Consolidated Finance L.P.
Bkd Senior Unsecured: Ba3
Senior Unsecured Shelf Registration: (P) Ba3
Donohue Forest Products Inc.
Bkd Senior Unsecured: Ba3
Abitibi's liquidity arrangements are characterized as being weak
according to Moody's SGL methodology, and accordingly,
have been assigned an SGL-4 Speculative Grade Liquidity Rating.
The company maintains a C$816 million revolver that is largely
un-drawn and a US$500 million accounts receivable securitization
vehicle that is generally more fully utilized. The bank facility
matures in June 2006. While Moody's views it as adequate back-up
for the approximately C$400-to-C$500 million
in outstanding receivables' financing, the SGL-4 rating results
from two key components of Moody's liquidity assessment methodology:
i) Since Abitibi's accounts receivable securitization facility is uncommitted
(rather than committed for a term-to-maturity beyond the
forward looking rolling four quarter SGL time horizon) and may be terminated
(with prior notice) by the service provider, Moody's deems that
an approximately equivalent portion of the company's bank credit facility
is reserved for back-up purposes; and ii) Moody's SGL methodology
would considers a scenario that assumes Abitibi's bank credit cannot be
rolled over, and would therefore mature within 12 months (at June
30, 2006). In this circumstance, the company would
likely not generate sufficient cash flow to off-set the loss of
the external financing.
As noted above, SGL ratings are inherently more volatile than long-term
debt ratings. Whereas Moody's attempts to ensure that long-term
debt ratings are valid on a "through-the-cycle" basis,
SGL ratings are expected to change far more frequently. Given that
Abitibi's revolving bank credit facility matures in June of 2006,
and given Moody's SGL methodology and practice of reviewing SGL ratings
on a quarterly basis, in the event the credit facility's maturity
is extended prior to Moody's next review, there is the potential
of the SGL rating being revised upwards at that time.
Abitibi is in compliance with its key financial covenants (Maximum Debt-to-Capitalization
(66.9% actual at June 30, 2005 versus 70% threshold),
and Minimum Interest Coverage (2.2x actual at June 30th versus
1.50x threshold; threshold increases to 1.75x in 2006)).
Moody's estimates that Abitibi could access the entire unused amount of
the credit facility without violating its Debt-to-Capitalization
covenant. While the company is expected to be modestly Free Cash
Flow positive in 2005, it is not expected to turn a profit.
Consequently, the cushion relative to this test may not be as great
going forward. However, so long as Abitibi is not required
to make material adjustments to the carrying value of idled assets that
have not been written-off (beyond the C$75 million pre-tax
charge related to the Kenora and Stephenville facilites that will be taken
in the third quarter), and so long as additional price increases
are realized during the course of the year, Abitibi should be able
to manage this figure so that compliance is maintained. With Cash
Flow from Operations expected to display modest improvement over the next
several quarters, Moody's also expects the Interest Coverage test
cushion to increase through 2005.
The Ba3 ratings reflect Abitibi's very high financial leverage and
the resulting very poor credit protection measures observed over the past
three years. In addition, risks stemming from the ongoing
evolution of communication and advertising patterns, and their consequent
impact on the printing and writing papers market, including the
persistent decline of the North American newsprint business, are
an important influence. So too are risks related to the company's
exposure to further Canadian dollar appreciation, and as well,
pressure from other input costs such as wood, electricity,
chemicals and labor. The company's results have been quite
cyclical and are expected to remain so, with demand, price
and cash flow varying widely over short periods of time. Lastly,
Moody's anticipates that alternative uses of cash flow (pension
funding, selected investments) are likely to adversely affect debt
reduction. Despite the margin erosion caused by the above-noted
exchange rate dynamic, Abitibi continues to have relatively low
cash costs of production compared to its peer group. This is supported
by good backwards integration into fiber supply and good energy self-sufficiency.
The uncoated mechanical papers market appears to have modest positive
momentum, with six price increases in past two years, and
with capacity utilization in the commercial printing sector improving
from a very low base. Despite its debt burden, the company
has taken a leadership role in managing supply in order to balance the
market, and recently announced an additional initiative that Moody's
expects will assist in improving both market fundamentals and the company's
position. Successive term debt maturities though 2011 provide an
opportunity to de-lever if cash flow is available. While
the company is not actively selling assets, it has significant flexibility
to reduce debt from asset sale proceeds.
The outlook is negative, and reflects Moody's assessment of
the challenges facing the company in normalizing the relationship between
its debt load and its cash flow at the Ba3 rating level. The North
American newsprint market is characterized by declining demand,
and is in the midst of a protracted restructuring with participants removing
capacity in order to better balance supply with demand. With recent
producer actions chasing a target that moved much more quickly than was
anticipated, it is uncertain when they will catch-up,
and when pricing will generate acceptable returns. In addition,
the sustainability of the pricing impact of supply management initiatives
is not yet proven. For a given level of demand, Moody's
is skeptical that consumers have to accept pricing increases as a result
of input price or exchange rate induced cost-push pressures.
In the context of gradually declining demand, and with the potential
of slowing economic growth, it is not certain that margins can be
expanded on a sustainable basis, and consequently, margins
may remain under significant pressure. Accordingly, Moody's
is concerned that difficult North American market fundamentals may cause
current commodity pricing to be representative of near peak levels.
Therefore, while Moody's expects Abitibi's 2005 results
to show improvement over the dismal results posted for the past three
years, the magnitude and sustainability of the improvement are uncertain.
There are also risks that decreases in North American demand may yet again
accelerate, or that its relative cost position will be further eroded
by appreciation of the Canadian dollar, both of which would augment
the required debt-to-cash flow adjustments.
Moody's expectations for a Ba3 rating include average through-the-cycle
Retained Cash Flow to Total Adjusted Debt ("RCF/TD") in excess
of 10%, with the related (RCF-CapEx)/TD measure in
excess of 5%. Note that Moody's debt figures include
adjustments to debt for off-Balance Sheet Accounts Receivable securitization
vehicles, operating leases and unfunded pensions. These are
made since the underlying obligations contribute incremental leverage
that is debt-like. Either or both of the outlook and ratings
could be upgraded if Abitibi takes specific proactive steps to permanently
reduce indebtedness or increase profitability so as to ensure the above
credit metrics can, on average through the commodity price cycle,
be exceeded. In the absence of such proactive steps being implemented
in the very near term, and in the event either or both of 2005 results
and expectations for 2006 do not show dramatic improvement over the recent
past, a ratings downgrade becomes more likely. A downgrade
would also result from significant debt-financed acquisition activity
or were liquidity arrangements to deteriorate significantly.
Abitibi-Consolidated Inc., headquartered in Montreal,
Quebec, is North America's leader in newsprint and uncoated mechanical
paper and also has a significant lumber business.
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
No Related Data.
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