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18 Nov 2002
MOODY'S DOWNGRADES SR UNSEC DEBT RATINGS OF ABITIBI-CONSOLIDATED TO Ba1
Approximately $4.3 Billion of Debt Securities Affected.
New York, November 18, 2002 -- Moody's Investors Service downgraded the senior unsecured debt ratings
of Abitibi-Consolidated Inc. to Ba1 from Baa3. This
rating action concludes a review initiated on May 8, 2002.
The outlook is stable.
Ratings downgraded are:
Senior unsecured notes and debentures of Abitibi and its subsidiaries:
To Ba1 from Baa3
Senior unsecured shelf registration: To (P)Ba1 from (P)Baa3.
New ratings assigned:
Senior Implied rating: Ba1
Senior unsecured issuer rating: Ba1
The ratings downgrade is based on Abitibi's inability to materially reduce
debt following the 2000 acquisition of Donohue, a relatively weak
near term outlook for the company's core products, and Moody's expectation
that debt protection measurements will remain much weaker over the near
and intermediate term than previously envisioned. Abitibi significantly
increased leverage for the Donohue acquisition, in 2000.
The Baa3 ratings had assumed that Abitibi would utilize free cash flow
during the ensuing 18 to 24 month period to reduce leverage and restore
debt protection measurements to levels consistent with an investment grade
rating. However, higher capital spending (on the Sheldon
and Lufkin mills) and an opportunistic acquisition (incremental ownership
in Pan Asia Paper Company) prevented the company from materially reducing
leverage when cash flow was high. And now that company's core newsprint
and lumber markets have weakened, cash flow is no longer sufficient
to support meaningful debt reduction. While the company has paid
some debt since the time of the acquisition with the proceeds of an asset
sale (the Saint Felician pulp mill), it has fallen short of the
level of the level previously anticipated. Debt at the end of the
third quarter is around C$6 billion, including accounts receivable
financing, which is very high in comparison to anticipated cash
flow over the near and intermediate term. We project retained cash
flow to total debt at only around 5% for 2002, and between
10 - 15% for 2003; levels which are not consistent
with an investment grade rating.
Abitibi and other producers of newsprint were successful in putting through
a $50 newsprint price increase in October, but prices remain
relatively low. Moody's does not currently believe that there is
adequate newsprint demand to support a sustained improvement in newsprint
prices over the intermediate term, meaning that Abitibi's debt protection
measurements may remain depressed for a prolonged period of time.
Further, the outlook for Abitibi's lumber business remains poor.
The company is not likely to generate meaningful cash flow from its lumber
business until after there is some resolution of the U.S./Canadian
softwood lumber dispute, and after related duties have been either
been reduced or eliminated. The company has significantly cut back
on capital spending during the current industry downturn to minimize cash
usage, and to prevent a further increase in debt. Although
Moody's does not expect the company to spend at a level equivalent to
depreciation, the rating agency believes that current spending levels
are unsustainable over the long term, if the company is to maintain
its competitive position.
Abitibi's liquidity is sufficient. The company maintains an C$800
million revolver that is largely undrawn. A portion of the revolver
($500 million) is a 364 day facility, but recently renewed.
Moody's believes that the revolver is adequate support for around C$400
million in outstanding receivables financing, as well as any other
contingent need. The company is currently generating a modest level
of positive free cash flow. Covenants are relatively tight,
but manageable, and Moody's does not believe that relief will be
Abitibi-Consolidated, headquartered in Montreal, Quebec,
is a global leader in newsprint, uncoaoted groundwood papers and
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Moody's Investors Service
No Related Data.
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