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Rating Action:

MOODY'S DOWNGRADES INTERNATIONAL PAPER'S DEBT RATINGS TO Baa3 AND P-3

05 Dec 2005
MOODY'S DOWNGRADES INTERNATIONAL PAPER'S DEBT RATINGS TO Baa3 AND P-3

Approximately $12.6 billion of rated debt instruments affected

Toronto, December 05, 2005 -- Moody's Investors Service ("Moody's") downgraded International Paper Company's ("IP") long term debt ratings to Baa3 from Baa2. Commercial paper ratings were also downgraded, to Prime-3 from Prime-2. The outlook was restored to stable. The ratings downgrade reflects Moody's view that credit metrics will continue to lag those appropriate for a Baa2 rating until the benefits of a 3-year $1.2 billion profit improvement plan is realized. On July 19th, IP announced an ambitious transformation of its business that contemplates significant asset divestitures, debt reduction and performance improvements being implemented over a 2-to-3 year period. Included in the assets IP plans to divest is the company's substantial timberlands holding. While IP's credit metrics have historically been weak for its rating, the company's timberland asset provided latent cash flow, and the capacity to achieve credit metrics supporting the previous rating. Subsequent to divestiture and application of the proceeds, the latent debt reduction cushion will have been consumed, and the company will be required to exhibit debt metrics and other characteristics more in line with Moody's actual rating. With Moody's anticipating that credit metrics will continue to lag those appropriate for the rating over the near-to-mid term, and considering the execution risks and the potential of exogenous factors adversely affecting implementation progress, Moody's concluded it was appropriate to downgrade the rating to a level more representative of expected near term financial performance. The rating action concluded a review initiated on July 20, 2005.

Ratings downgraded:

International Paper Company:

Senior Unsecured: to Baa3 from Baa2

Commercial Paper: to Prime-3 from Prime-2

Subordinate Shelf: to (P)Ba1 from (P)Baa3

Preferred Shelf: to (P)Ba2 from (P)Ba1

International Paper Capital Trust II:

Bkd Preferred Stock: to Ba1 from Baa3

International Paper Capital Trust III:

Bkd Preferred Shelf: to Ba1 from Baa3

International Paper Capital Trust IV:

Bkd Preferred Shelf: to (P) Ba2 from (P) Ba1

International Paper Capital Trust VI:

Bkd Preferred Shelf: to (P) Ba2 from (P) Ba1

Champion International Corporation:

Senior Unsecured: to Baa3 from Baa2

Federal Paper Board Co., Inc.

Senior Unsecured: to Baa3 from Baa2

Union Camp Corporation:

Senior Unsecured: to Baa3 from Baa2

Outlook restored: stable

The positive factors that support IP's Baa3 long term debt rating include the flexibility and market access that results from its industry-leading scale. IP also has good vertical integration, being fully backwards integrated into pulp, and substantially forward integrated with its output being sold directly to end consumers. IP is also perceived as having a well-invested asset base, indicating that its profit improvement plans are more likely to have a positive outcome. The company also has superior liquidity and capital markets access, factors that allow management of extraneous shocks.

Historically, IP was also seen as having a significant ability to reduce debt from the proceeds of asset sales, and as having above average product line diversity. With the planned business transformation, IP will be more focused and will have a reduced ability to significantly reduce debt from the proceeds of asset sales. Profit improvement and debt reduction through the transformation process will be key to IP's rating. This is especially so given ongoing input price stress, and concerns that economic conditions will moderate, thereby limiting the magnitude and duration of the ongoing commodity price recovery. As well, with its increased product line concentration, it is possible that the company's cash flow stream may be more volatile than was the case in the past. All of these factors substantiate the importance of IP's profit improvement objectives, and the consequence of the company's objectives not being fully achieved. This is especially so given the company's significant exposure to mature North American markets, where strong cash flow generation in capital intensive businesses is likely to involve significant challenges.

The outlook is stable, with further ratings movement not likely until IP's business model stabilizes. Subsequently, upwards rating pressure could result if debt reduction and profit improvement allow normalized retained cash flow to debt ("RCF/TD") to approach 25%, with the commensurate (RCF-CapEx)/TD figure exceeding 10%. Conversely, should expectations of normalized RCF/TD and (RCF-CapEx)/TD decline towards 15% and 5% respectively, negative rating pressure could result. Negative rating pressure could also result from material set-backs in the company's profit improvement and debt reduction plans, debt-financed acquisitions, and adverse developments with liquidity arrangements.

International Paper Company, headquartered in Stamford, CT, is a worldwide producer of communication and packaging papers.

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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