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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.
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
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
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.
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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