MOODY'S DOWNGRADES BOWATER SENIOR UNSECURED DEBT TO Baa2; UPGRADES AVENOR SENIOR UNSECURED DEBT TO Baa3
New York, 05-01-98 -- Moody's Investors Service downgraded the senior unsecured debt of Bowater Inc. from Baa1 to Baa2. In addition, Moody's assigned a Baa2 rating to the Bowater's proposed $1 billion bank facility, which will rank pari passu with existing senior unsecured debt. At the same time, the rating agency upgraded the senior unsecured debt ratings of Avenor Inc. from Ba1 to Baa3. The rating actions anticipate the completion of Bowater's planned acquisition of Avenor, which is expected to close by the end of the second quarter of 1998. The revised ratings for Bowater reflect the significant increase in debt which the company will incur as part of the acquisition. The new rating for Avenor reflects the company's anticipated position as a wholly owned subsidiary of Bowater, but also reflects Moody's expectation that there will not be a formal guarantee from the new parent. This rating action completes a review initiated on Mach 9, 1998.
Ratings downgraded are:
Senior notes, debentures, and IRB's, to Baa2 from Baa1;
Cumulative perpetual preferred stock, to "baa3" from "baa2".
New rating assigned:
Senior unsecured bank debt, Baa2.
Ratings upgraded are:
Senior unsecured notes and debentures, from Ba1 to Baa3;
Senior unsecured shelf, to (P)Baa3 from (P)Ba1.
In announcing the rating change for Bowater, Moody's mentioned the significant increase in debt and anticipated decline in debt protection measurements. Immediately following the acquisition, the company's ratio of debt to capital will increase from approximately 32% to around 50%. In addition, the company has announced other initiatives which could further increase debt, or prevent meaningful debt reduction over the near term. The planned acquisition of a newsprint mill from Halla Pulp and Paper, and an upgrade the company's Eash Millinocket mill, which will push capital spending above $300mm in each of the next two years, will each inhibit debt reduction over the near term.
In addition to the increase in debt, Moody's stated that the company's increasing exposure to market pulp was a factor in the rating decision. With the acquisition of Avenor, the company will become one of the largest producers of market pulp in North America, and Moody's believes that the increased exposure to pulp will add volatility to the company's cash flow and earnings.
However, the rating agency noted the company's intention to make debt reduction a priority. Proceeds from the planned sale of Avenor's pulp and uncoated freesheet mill at Dryden, Ontario will be used for debt reduction, as well as any proceeds from future timberland or hydro monetization programs. Moody's also stated that the company's strong operating position as the largest newsprint producer in the United States, the efficiency of its existing mills, and the expected cost savings from the merger of the two companies (which the company estimates at $75 million per annum) were factors supporting the new rating. Moody's rating assumes that excess cash generation, which should increase if the current trend for rising newsprint prices continues, will be applied to debt reduction.
In upgrading the rating of Avenor, Moody's noted the strong implicit support which will accrue from Bowater. As currently planned, Bowater will establish a wholly owned Canadian subsidiary to acquire all of the outstanding shares of Avenor, which will continue operating as a separate entity. However, Moody's believes that, given the cost of the acquisition to Bowater, there will be substantial incentive to support Avenor over the next several years. In addition, Moody's noted the improvement in the competitive cost position of Avenor's mills from the "Operational Excellence" program, and the substantial debt reduction accomplished by the company over the past 12 to 18 months as factors supporting the increase in the rating.
Bowater Inc., headquartered in Greenville, SC, is the largest producer of newsprint in U.S., and also makes coated and uncoated groundwood papers, bleached kraft pulp, and lumber products.
Avenor Inc., headquartered in Montreal, Canada, is the a large producer of newsprint and market pulp, with operations in white paper and wood products production.
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