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Rating Action:

MOODY'S DOWNGRADES SENIOR UNSECURED DEBT RATINGS OF TEMPLE-INLAND TO Baa3; SHORT TERM RATING TO PRIME-3; PLACES RATINGS OF GAYLORD ON REVIEW FOR POSSIBLE UPGRADE

05 Mar 2002
MOODY'S DOWNGRADES SENIOR UNSECURED DEBT RATINGS OF TEMPLE-INLAND TO Baa3; SHORT TERM RATING TO PRIME-3; PLACES RATINGS OF GAYLORD ON REVIEW FOR POSSIBLE UPGRADE

Approximately $2.6 Billion of Debt Securities Affected.

New York, March 05, 2002 -- Moody's Investors Service lowered the senior unsecured debt ratings of Temple-Inland to Baa3 from Baa2, and the short term rating for commercial paper to Prime-3 from Prime2. At the same time, the rating agency withdrew the Caa2 senior unsecured and Ca senior subordinated ratings of Gaylord Container Corporation, and placed the remaining ratings of Gaylord (senior secured bank debt at B2) on review for possible upgrade. The ratings actions stem from Temple-Inland's acquisition of Gaylord Container Corporation, which is expected to result in a near term increase in debt of around $880 million at Temple-Inland, and a corresponding decrease in debt at Gaylord. The increase in Temple-Inland's debt, which comes during a cyclical downturn in the company's commodity businesses, will stress debt protection measurements over the near and intermediate term, and will significantly elevate the company's refinancing risk over the next 12 months. This ratings action completes a ratings review begun on September 28, 2001.

Ratings downgraded are:

Temple-Inland

Senior unsecured notes, debentures, and revenue bonds; to Baa3 from Baa2

MTN program, to Baa3 from Baa2

Short term ratings for commercial paper, to Prime-3 from Prime-2

Ratings withdrawn:

Gaylord Container Corporation:

Senior unsecured notes, Caa2

Senior subordinated notes, Ca

Ratings placed on review for possible upgrade:

Gaylord Container Corpoation:

Senior secured bank debt: B2

Senior implied rating: Caa1

Issuer rating; Caa2

Temple-Inland has purchased a majority of the outstanding notes and common shares of Gaylord Container Corporation (Gaylord), in a transaction valued at approximately $934 million. We believe the acquisition makes good strategic sense for Temple-Inland. It significantly increases the company's presence in containerboard (a core business), increases vertical integration (resulting in more stable pricing over the long term), and provides the opportunity to increase margins with cost savings and synergies.

However, the transaction will initially result in a substantial increase in near term leverage and decline in debt protection measurements. The benefits of the acquisition will be overshadowed over the next 18 to 24 months by the increase in interest expense that will accrue from the transaction. Temple-Inland is financing the acquisition using the proceeds of a $900 million 364-day bridge facility, which will be secured by the assets of Gaylord and approximately $250 million timberlands. We believe that the creation of such a large, relatively short term (12 months) secured bridge financing is negative for existing senior unsecured note-holders. It creates a superior claim on a portion of existing assets, and significant refinancing risk over the near term, which could stress the company's liquidity.

Temple-Inland plans to refinance the bridge loan with a combination of equity, equity-like securities, and longer term debt. The revised ratings assume that the company uses an appropriate percentage of equity and equity like securities to refinance the bridge loan.

Temple-Inland's liquidity profile is adequate. The company currently has sufficient bank availability and other sources of liquidity to meet current obligations, but a number of its bank facilities mature in 2002 or contain ratings triggers. The company will need to renew some of its bank facilities this year, or refinance maturing bank facilities with longer-term debt.

Temple-Inland's ratings continue to be constrained by the higher level of risk at its financial service subsidiary (primarily Guaranty Bank). The financial services business has grown to represent a larger portion of the Temple-Inland's aggregate operating income, but has a higher risk profile than that of Temple-Inland (the parent). If Guaranty were to have difficulties, there is a possibility that Temple-Inland could be required to put additional capital into the bank.

The outlook for Temple-Inland's ratings is negative, and reflects concern over the need to access multiple capital markets over the next 12 months to address maturing debt and liquidity needs. We would expect to consider shifting the ratings outlook to stable when the company has refinanced the bridge loan in its entirety, when maturing bank agreements have been refinanced, and when liquidity generally improves.

The withdrawal of the Gaylord senior and subordinated debt ratings reflects the acquisition of a significant majority of the outstanding notes by Temple-Inland. The review of the B2 ratings on Gaylord's bank debt, as well as the company's senior implied and issuer ratings, is based on the significantly lower level of leverage at Gaylord, and the implied support from Temple-Inland. Temple-Inland is expected to retire Gaylord's bank debt on or before the date that all remaining Gaylord shares are purchased, at which point all ratings on Gaylord will be withdrawn.

Temple-Inland, headquartered in Texas, is an integrated forest products company with operations in paper, building products, and financial services.

.

New York
Richard Stephan
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Mark Gray
Senior Vice President
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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