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Rating Action:

MOODY'S DOWNGRADES GEORGIA-PACIFIC'S CORP FAMILY RATING TO Ba3, SR UNSRD TO B2 AND SGL TO SGL-3; NEW SR SCRD DEBT RATED Ba2 WITH SECOND LIEN Ba3; OUTLOOK RESTORED TO STABLE

06 Jan 2006

Approximately $15 billion of debt affected

Toronto, January 06, 2006 -- Moody's Investors Service ("Moody's") downgraded Georgia-Pacific Corporation's ("GP") corporate family rating by two notches to Ba3. Subsequent to Koch Forest Products, Inc's ("KFP") $21.5 billion December 23, 2005 acquisition of GP, book debt nearly doubles to an estimated $15.4 billion from $7.9 billion (at Sept. 30, 2005). Even after accounting for GP's dividend and certain public company expenses being eliminated, the impact on credit metrics warrants the downgrade. The acquisition transaction contemplates GP being owned by an indirect wholly-owned subsidiary of Koch Industries Inc. ("Koch"), Georgia-Pacific Holdings, LLC ("GPH"). GPH also holds 100% of Koch Cellulose, LLC ("Ko-Cell"). Owing to the structural seniority resulting from a security package supported by subsidiary guarantees, Moody's rated GP's new senior secured credit facilities Ba2, with the associated second lien facility being rated Ba3. The $113 million residual of the debt that was not submitted to GP's November/December tender offer, and that was either, issued by GP and guaranteed by its' Fort James ("FJ") subsidiaries, or was issued by FJ and guaranteed by GP, was downgraded to B1, with GP's senior unsecured and un-guaranteed debt downgraded to B2. With Ko-Cell's bank debt being repaid, the applicable ratings will be withdrawn. Lastly, with GP's liquidity being adversely affected by drawings related to the acquisition, the core revolving credit facility being reduced in size by $500 million, with there being $600 million in term debt maturities and a further $750 million due if the one-year receivables financing facility is not extended, and with GP not having access to the public equity market, Moody's downgraded GP's speculative grade liquidity rating to SGL-3, indicating only adequate liquidity, from SGL-2, indicating good liquidity. With GP's transition to a private company, the SGL rating will be withdrawn. With the rating actions, Moody's restored the ratings outlook to stable and concluded a review initiated on November 15, 2005.

Ratings assigned:

Georgia-Pacific Corporation:

$1,500,000 Secured Guaranteed 5-Year Revolving Bank Facility: Ba2

$2,000,000 Secured Guaranteed 5-Year Term Loan A: Ba2

$5,000,000 Secured Guaranteed 7-Year Term Loan B: Ba2

$2,500,000 Second Lien Guaranteed 8-Year Term Loan: Ba3

Ratings Downgraded; Outlooks Restored to Stable:

Georgia-Pacific Corporation: Outlook: Stable

Corporate family rating: to Ba3 from Ba1

Senior unsecured: to B2 from Ba2

Speculative Grade Liquidity Rating: to SGL-3 from SGL-2 (to be subsequently withdrawn)

Fort James Corporation: Outlook: Stable

Senior Unsecured: to B1 from Ba1

G-P Canada Finance Company: Outlook: Stable

Backed senior unsecured: to B2 from Ba2

Fort James Operating Company: Outlook: Stable

Backed senior unsecured: to B1 from Ba1

GP's Ba3 corporate family rating results primarily from the company's significant debt load, particularly as Moody's does not expect it to be significantly reduced over the near term. While the company may sell assets and apply the proceeds towards debt reduction, given the potentially similar magnitudes of the company's cash flow leverage and the potential cash flow multiples that could be realized by selling certain discrete assets, it is unlikely that asset divestitures will facilitate significant near-term improvement in debt protection measures. This suggests that de-leveraging will result primarily from operating cash flow. While cash flow will benefit from the elimination of GP's dividend and certain expenses related to being a public company, since GP participates in very competitive markets, Moody's believes it is difficult for the company to improve margins relative to those of its competitors. Moreover, given overall economic conditions and the duration of the economic recovery thus far, operating cash flow levels may be susceptible to downside risks. This is particularly the case given the possibility that future results could be suppressed if demand for the company's output declines while off-shore demand causes input costs for energy and fiber to remain elevated. In addition, the company's results continue to be suppressed by ongoing asbestos related payments. This cash drain will continue, and there is also the possibility that asbestos liabilities may provide periodic earnings and cash flow shocks.

Further, GP's transition to a private company is accompanied by wholesale executive management and board changes. While Koch has a good track record in acquiring and managing businesses, this lack of continuity may adversely affect GP's performance. In addition, the going-private transaction limits GP's potential access to external financing. At the revised rating levels, and given that GP is now a private company, applicable market depth is expected to be reduced.

Moody's does not expect significant changes in key rating factors over the near term, and, accordingly, the outlook is stable. However, given that current credit protection measures are somewhat weak for the ratings, improvement over time, through either debt reduction or higher margins, will be necessary to maintain the ratings at the current level. Specifically, if the company is not able to achieve and sustain metrics of at least 10% for RCF/TD and 5% for (RCF-CapEx)/TD over the next twelve to eighteen months, the ratings will likely come under pressure. Given the need to improve performance to maintain the current ratings, an increase in ratings or a change in outlook to positive is not envisioned at this time. Ratings pressure could also result if liquidity arrangements deteriorate materially, asbestos liabilities increase suddenly and substantially, or a debt financed acquisition transpires.

GP's credit profile benefits from ongoing margin expansion in the key tissue segment. While Moody's views all of the company's key segments as having margins that vary over time, recent tissue segment margin expansion may prove to be sustainable if the key participants continue to exercise discipline to neutralize the influence of excess capacity. Together with oligopoly supply, the company's very significant presence in this market increases this likelihood. Significant aggregate scale is also observed in GP's other two key product lines (building products and packaging), providing: a) superior access to end markets and customers; b) significant purchasing and logistics economies; c) potential for enhanced access to financing; d) enhanced flexibility to rationalize operations; and e) increased flexibility to divest of certain operations should the need arise. In addition, GP's product line diversity is also a key positive factor. This provides the potential for a less volatile aggregate cash flow stream and an increased potential of being able to generate cash by divesting of discrete business lines. Secondary strengths are provided by GP's relatively low manufacturing costs in its key product lines, providing defensible market positions in the event of a market downturn. GP will also benefit from sponsorship benefits provided by Koch. Over time, GP expects to be able to improve operations and reduce costs. As noted above, the ratings' assessment incorporates anticipated benefits.

Headquartered in Atlanta, Georgia, Georgia-Pacific Corporation, is a privately owned global leader in tissue and other consumer products, and has significant operations in building products and paper-based packaging.

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

MOODY'S DOWNGRADES GEORGIA-PACIFIC'S CORP FAMILY RATING TO Ba3, SR UNSRD TO B2 AND SGL TO SGL-3; NEW SR SCRD DEBT RATED Ba2 WITH SECOND LIEN Ba3; OUTLOOK RESTORED TO STABLE
No Related Data.
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