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Rating Action:

MOODY'S DOWNGRADES WEYERHAEUSER SENIOR UNSECURED TO Baa2; WILLAMETTE SENIOR UNSECURED TO Baa2

11 Feb 2002
MOODY'S DOWNGRADES WEYERHAEUSER SENIOR UNSECURED TO Baa2; WILLAMETTE SENIOR UNSECURED TO Baa2

Approximately $7.0 Billion of Debt Securities Affected.

New York, February 11, 2002 -- Moody's Investors Service downgraded the senior unsecured debt ratings of Weyerhaeuser Company and its guaranteed subsidiaries to Baa2 from A3, and the senior unsecured debt ratings of Willamette Industries, Inc. to Baa2 from A3. At the same time, the rating agency confirmed Weyerhaeuser's Prime-2 short term rating for commercial paper. The rating actions stem from the increase in leverage that will occur with Weyerhaeuser's planned acquisition of Willamette, and the corresponding decline in debt protection measurements. The revised ratings reflect the combined company's relatively low cost operations, its high level of fiber self-sufficiency, its large and valuable woodlands position, and its size and market position in core businesses. However, the ratings also reflect a very high level of debt, the company's heavy exposure to the cyclical lumber, pulp, and paper markets, and associated volatility in earnings and debt protection measurements. These ratings actions conclude a review begun on November 13, 2000.

Ratings downgraded are:

Weyerhaeuser Company:

Senior unsecured notes, debentures and revenue bonds; to Baa2 from A3

Medium term notes, to Baa2 from A3

Senior unsecured shelf registration; to (P)Baa2 from (P)A3

MacMillan Bloedel Limited:

Senior unsecured notes, debentures, and revenue bonds; to Baa2 from A3

Willamette Industries Inc.

Senior unsecured notes and debentures; to Baa2 from A3

Medium term notes; to Baa2 from A3

Willamette Capital Trust I and II

Guaranteed Trust Original Peferred Securities; to (P)Baa3 from (P)Baa1

Ratings confirmed are:

Weyerhaeuser Company:

Short term rating for commercial paper; Prime-2

Weyerhauser has agreed to acquire Willamette for approximately $6.2 billion in cash. The transaction, which is expected to close within the next two weeks, will result in a significant increase in the leverage of the combined entity. Total consolidated debt, including approximately $1 billion at Weyerhaeuser Real Estate Company (WRECO; Prime-2), will be around $14 billion at the time of closing. Total debt to capital will be at or around 61%. This increased leverage, combined with the current cyclical downturn in building products, pulp, and paper, will produce earnings and debt protection measurements that will, initially, be quite weak for the ratings. The company's projected EBIT interest coverage will be between 1.5-2.0x in 2002, with retained cash flow to total debt of around 12%.

Weyerhaeuser will finance the acquisition with a $4 billion 18-month bridge loan, a $2 billion five year revolving credit facility, and a $2 billion 364-day revolving credit facility. The revolving credit facilities will be used for acquisition financing and working capital needs, and as alternate liquidity for Weyerhaeuser's commercial paper (and that of Weyerhaeuser Real Estate Company, a co-borrower). We expect the company to rely primarily on bank financing, and its use of commercial paper will be relatively modest over the near term. We believe that Weyerhaeuser will have adequate liquidity in that Cash from operations, combined with availability under the bank facilities, should be sufficient to support all short-term cash requirements at both the parent company and WRECO.

The company plans to reduce leverage over the course of the next several years primarily with cash from operations. Although free cash-flow is not likely to support meaningful debt reduction in 2002, a recovering economy and a cyclical upturn for the company's key products should enable Weyerhaeuser to reduce leverage in 2003 to a level that produces debt protection measurements more consistent with the revised ratings. We expect Weyerhaueser to reduce total consolidated debt to about $12.7 billion by the end of 2003, resulting in a ratio of EBIT to interest for the year of around 3.0x.

The outlook for the ratings is stable. However, the company will need to remain very focused on reducing leverage, and will need to meet current expectations for debt reduction. In addition, the company will need to successfully refinance the 18 month bridge financing over the near term. Any material delay in the company's plans to reduce leverage would likely have negative consequences for the ratings.

At closing, Willamette will become a wholly owned subsidiary of Weyerhaeuser. Current plans envision merging the Willamette subsidiary into Weyerhaeuser over the near term, eliminating any potential issues related to structural subordination and movement of operating cash flow.

Weyerhaeuser, headquartered in Federal Way, Washington, is one of the largest paper and forest producs companies in the world. The company has significant positions in market pulp, white paper, containerboard, and wood products.

Willamette Industries Inc., headquartered in Portland, Oregon, is an integrated forest products company with more than 100 plants, located in France, Ireland, and Mexico, which produce building materials, composite wood panels, fine paper, office and paper products, corrugated packaging, and grocery bags.

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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