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Rating Action:

MOODY'S DOWNGRADES ABITIBI'S DEBT RATINGS TO B1; OUTLOOK IS STABLE

08 Dec 2005
MOODY'S DOWNGRADES ABITIBI'S DEBT RATINGS TO B1; OUTLOOK IS STABLE

Approximately US$3.8 Billion of Debt Securities Affected

Toronto, December 08, 2005 -- Moody's Investors Service ("Moody's") downgraded Abitibi-Consolidated Inc.'s ("Abitibi") long-term debt ratings to B1 from Ba3, and restored the outlook to stable. At the same time, the company's speculative grade liquidity rating was upgraded to SGL-2, indicating good liquidity, from SGL-3, indicating adequate liquidity. The downgrade to B1 reflects Moody's assessment that margins are unlikely to dramatically expand on a sustainable basis from current levels, and that credit metrics are likely, on average, to reflect B1-level measures over the near-to-mid term. In addition, Moody's stated that elevated costs for energy and transportation, and the negative impact of a stronger Canadian dollar were also factors in the ratings downgrade since they largely negate the positive impact of recent newsprint price increases. With free cash flow from operations for 2005 expected to be only marginally positive after three years of deficits, a dramatic reduction in the company's debt load is not anticipated, and after adjusting for the impact of the sale of Abitibi's 50% interest in the PanAsia joint venture, Moody's does not expect significant changes in credit metrics other than those related to temporal commodity price movement. The rating action concludes a review initiated on October 26th.

Ratings downgraded:

Abitibi-Consolidated Inc.

Corporate family rating: to B1 from Ba3

Senior unsecured rating: to B1 from Ba3

Senior Unsecured Shelf Registration: to (P)B1 from (P)Ba3

Abitibi-Consolidated Company of Canada

Bkd senior unsecured: to B1 from Ba3

Senior unsecured shelf registration: to (P)B1 from (P)Ba3

Abitibi-Consolidated Finance L.P.

Bkd senior unsecured: to B1 from Ba3

Senior unsecured shelf registration: to (P)B1 from (P) Ba3

Donohue Forest Products Inc.

Bkd senior unsecured: to B1 from Ba3

Outlook restored for the above: Stable

Rating upgraded:

Abitibi-Consolidated Inc.

Speculative grade liquidity rating: to SGL-2 from SGL-3

Abitibi's B1 long term debt ratings are influenced primarily by its substantial debt load and poor profitability resulting from a long period of excess paper supply that suppressed prices. Recent performance has been negatively impacted by currency exchange rate migration and input cost inflation that has neutered the impact of US$-denominated commodity price increases. Abitibi has been unable to repay debt from internally generated cash flow, and its debt load has not decreased as originally planned. Cash generation has also been quite volatile, and free cash flow has been negative for much of the recent past. This has been exacerbated by cash pension funding in excess of the related expense.

Moody's believes that newsprint, Abitibi's primary market, will continue to be characterized by declining demand. Abitibi was one of the first to recognize this, initiating an extensive cull of high cost supply to both decrease its average cost position and improve market balance, and industry-wide supply management activities have facilitated eight price increases since pricing bottomed in 2002. However, in Moody's view, continued supply side management will be necessary to support and maintain prices over the long term. Parallel price increases have been implemented in the closely related commercial printing paper markets the company serves, and in these markets, demand has been growing.

The company's strategy (including its successful substitute/alternative uncoated woodfree paper offering) and its relatively low cost position support the rating. In addition, the ratings are supported by the latent debt reduction capacity provided by the company's hydro electric and certain geographically dispersed assets, which could provide opportunities to reduce debt leverage to cash flow. The company could also reduce or cut its dividend.

The upgrade of the liquidity rating to SGL-2 from SGL-3 is based on more favorable terms in the company's recently refinanced credit facilities, as well as a modest improvement in cashflow. Abitibi recently completed a refinance of its bank credit facility, with terms to maturity extended to three full years, and relaxed financial covenants. Owing to this dynamic, and in conjunction with much reduced near term debt maturities as a consequence of the application of the PanAsia sale proceeds, Abitibi's speculative grade liquidity rating was upgraded to SGL-2, indicating good liquidity, from SGL-3, indicating adequate liquidity.

The $700 million bank credit facility now benefits from security. In aggregate, between debt at subsidiaries, accounts receivable securitization programs, and the amended bank credit facilities, the degree of structural subordination faced by bond holders has increased substantially. Assuming full utilization, approximately 20% of the company's funding benefits from a preferential claim on assets. However, while detrimental to bond-holders, this relative advantage is not sufficient to warrant notching of the long term debt rating from the corporate family rating.

At the revised B1 long term debt rating level, the outlook is stable. While Moody's anticipates periods when metrics may exceed or lag those appropriate for the rating as commodity prices vary in response to temporal demand fluctuations, performance is, on average, anticipated to reflect B1 metrics.

Either or both of the outlook and ratings could be upgraded if, as a consequence of increased cash flow or reduced indebtedness, Moody's assessed Abitibi's normalized retained cash flow to debt ("RCF/TD") as being sustainable at levels approaching 10%, with the attendant (RCF-CapEx)/TD figure approaching 5%. Conversely, a downgrade could result if Moody's opinion of RCF/TD and (RCF-CapEX)/TD involved measures declining significantly below 5% and 2% respectively, if the company pursues material debt-financed acquisitions, or if liquidity arrangements 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.

New York
Mark Gray
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Toronto
William Wolfe
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

No Related Data.
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