Moody's Investors Service downgraded the senior implied debt ratings of Georgia-Pacific Corporation to Ba2 from Ba1. The ratings downgrade is based on Georgia-Pacific's continued high level of debt, the uncertainty associated with its rising asbestos liabilities, and a weak near term outlook for the company's commodity products, which Moody's expects will impede the company's ability to achieve significant debt reduction in the near term. Moody's considers debt either issued or guaranteed by the Fort James subsidiary to be superior to other Georgia-Pacific debt, and has therefore rated these obligations Ba2: the non-supported debt is rated Ba3 to reflect the structural subordination. The debt ratings downgraded are as follows:MOODY'S LOWERS GEORGIA-PACIFIC DEBT RATINGS (SR IMPLIED) TO Ba2, NEGATIVE OUTLOOK; DEBT NOT BENEFITING FROM FORT JAMES GUARANTEE LOWERED TO Ba3
Senior Implied Rating: to Ba2 from Ba1
Issuer Rating: to Ba2 from Ba1
Fort James Corporation:
Senior unsecured notes, debentures, and MTN program; to Ba2 from Ba1
PC Revenue Bonds; to Ba2 from Ba1
Fort Howard PC revenue bonds; to Ba2 from Ba1
Senior unsecured notes, debentures, and IRB's; to Ba3 from Ba1
Senior unsecured shelf registration; to (P)Ba3 from (P)Ba1
G-P Canada Finance Company notes: to Ba3 from Ba1
Great Northern Nekoosa IRB's; to Ba3 from Ba1
Seven-year guaranteed (by Fort James) notes: Ba2
The revised ratings of Georgia-Pacific reflect company's high financial leverage, the significantly greater financial strength of its principal competitors in the tissue business, and the long-term uncertainty surrounding the company's asbestos liabilities. The ratings also consider its substantial share of the consumer and away from home tissue markets, strong brand position, sizeable presence in building products, and low cost packaging operation. The outlook for the ratings is negative, reflecting the potential for continued adverse asbestos developments, and refinancing requirements during the next 2 years.
The company is in the process of raising additional long-term financing through a note offering (rated Ba2), with the proceeds going to repay the capital markets bridge facility and reduce debt outstanding on its revolving credit facility (maturing in 2005). The refinancing, which is consistent with Moody's expectation that Georgia-Pacific has access to the capital needed to refinance these maturities, reduces its reliance on short term debt and improves its liquidity profile.
Georgia-Pacific recently recorded a $315 million (pre-tax) asbestos-related charge, in addition to a $350 million charge taken in Q4/01. The increased provision primarily reflects higher than anticipated costs associated with mesothelioma cases, and the incremental cost of maintaining a 10-year time horizon in the accrual. Although costs being incurred are within GP's financial capacity, the new charge and, in Moody's view, the likely need to take additional provisions in the future, underscores the uncertainty associated with various aspects of asbestos litigation; including the number of cases, the financial health of other companies with asbestos exposure, settlement costs, jury awards, and insurance recoveries. Until an improving trend is clearly evident, Moody's considers the ratings of Georgia-Pacific will be constrained by this higher degree of risk.
Georgia-Pacific's cash generation has been significantly below expectations since the acquisition of Fort James in 2000. This, combined with a high level of debt (currently about $11.5 billion) has produced debt protection measurements that continue to be much weaker than previously envisioned, and more consistent with the revised ratings. Since the acquisition, a substantial amount of debt has been repaid using the proceeds of asset sales, an alternative that is less likely going forward. Looking forward over the near and intermediate term, a relatively weak outlook for the company's commodity products, and price competition in the tissue business, are expected to result in a low level of cash flow in relation to debt, and will inhibit meaningful debt reduction. For year-end 2002, we estimate Total Debt to EBITDA to be just under 5 times, and unless the building products operations recover to mid-cycle or above levels, we expect the leverage to remain high for at least the next several years.
The company's debt structure includes both secured debt ($900 mm accounts receivable program), substantial debt issued at the Fort James subsidiary ($1.7 billion), and guarantees extending from Fort James and other subsidiaries to Georgia-Pacific's bank facility ($3.5 billion in total). The proposed new bond issue will be guaranteed by Fort James, but as the proceeds will go to repay existing guaranteed debt, it will not increase the amount of debt being guaranteed by Fort James. Moody's considers the relative credit quality of debt that benefits from a Fort James guarantee to be superior to debt issued by other subsidiaries without a guarantee from Fort James. The strength of Fort James' cash flows and the extra level of insulation from asbestos liabilities are the primary considerations supporting this view.
Georgia-Pacific Corporation, headquartered in Atlanta, Georgia, is one of the world's largest paper and forest products companies, and the largest producer of tissue products in North America.
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