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22 Mar 2005
MOODY'S RATES ABITIBI-CONSOLIDATED'S NEW US$500 MM SNR UNSEC'D BONDS Ba3; AFFIRMS Ba3 SNR UNSEC'D RATING AND SGL-4 SPEC GRADE LIQUIDITY RATING; OUTLOOK REMAINS NEGATIVE
Approximately US$3.8 Billion of Debt Securities Affected
Toronto, March 22, 2005 -- Moody's Investors Service rated Abitibi-Consolidated Inc.'s
("Abitibi") new (up to) US$500 million senior unsecured debt issue
Ba3. Concurrently, the company's Ba3 senior implied,
senior unsecured and issuer ratings were affirmed, as was the SGL-4
speculative grade liquidity ("SGL") rating (indicating weak liquidity).
Since the debt issue and tender offer eliminate near term maturities,
Moody's anticipates the SGL rating will be upgraded upon completion.
The outlook remains negative. While the new US$500 million
debt issue and refinance are neutral to Abitibi's debt leverage,
Moody's has noted in recent communications that the company's
credit protection metrics lagged its rating, and that proactive
steps were required so as to more appropriately balance cash flow to debt.
While Moody's is encouraged that the Company's ongoing "in-depth
operations review" involving four paper-making facilities --
part of longer term effort to restructure the North American newsprint
sector - will have a positive impact on newsprint market fundamentals,
given the measured pace with which pricing increases are being implemented,
and given the potential of slowing economic growth in 2006, Moody's
remains concerned that the company's cash flow will not reach adequate
levels relative to its debt load in advance of a potential cyclical demand
decrease and pricing retreat. Accordingly, the time frame
for significant improvement in credit statistics is advancing.
Should this not occur over the very near term, whether by way of
significantly improved cash flow from operations or as a result of proactive
debt reduction, Moody's will re-evaluate Abitibi's
rating. This could occur before the end of the calendar year.
Until conclusive evidence of the benefits of the market structure revisions
the company is leading is observed on a sustained basis, a ratings
upgrade is unlikely. The most positive near-to-mid
term rating action would involve the outlook being revised to stable from
negative. In absence of near term progress in permanently improving
credit metrics, a ratings downgrade would be considered.
Abitibi-Consolidated Company of Canada:
Senior unsecured 7-and-10 year notes of up to US$500
million (term-to-maturity split to be determined):
Senior Implied: Ba3
Senior Unsecured: Ba3
Senior Unsecured Shelf Registration: (P)Ba3
Speculative Grade Liquidity Rating: SGL-4
Abitibi-Consolidated Company of Canada
Bkd Senior Unsecured: Ba3
Senior Unsecured Shelf Registration: (P)Ba3
Abitibi-Consolidated Finance L.P.
Bkd Senior Unsecured: Ba3
Senior Unsecured Shelf Registration: (P) Ba3
Donohue Forest Products Inc.
Bkd Senior Unsecured: Ba3
The Ba3 ratings reflect Abitibi's very high financial leverage and
the resulting very poor credit protection measures observed over the past
three years. In addition, risks stemming from the ongoing
evolution of communication and advertising patterns, and their consequent
impact on the printing and writing papers market, including the
persistent decline of the North American newsprint business, are
an important influence. So too are risks related to the company's
exposure to further Canadian dollar appreciation, and as well,
pressure from other input costs such as wood, electricity,
chemicals and labor. The company's results have been quite
cyclical and are expected to remain so, with demand, price
and cash flow varying widely over short periods of time. Lastly,
Moody's anticipates that alternative uses of cash flow (pension
funding, selected investments) are likely to adversely affect debt
Despite the margin erosion caused by the above-noted exchange rate
dynamic, Abitibi continues to have relatively low cash costs of
production compared to its peer group. This is supported by good
backwards integration into fiber supply and good energy self-sufficiency.
The uncoated mechanical papers market appears to have modest positive
momentum, with five price increases in past two years, and
with capacity utilization in the commercial printing sector improving
from a very low base. Despite its debt burden, the company
has taken a leadership role in managing supply in order to balance the
market, and recently announced an additional initiative that Moody's
expects will assist in improving both market fundamentals and the company's
position. Successive term debt maturities through 2011 provide
an opportunity to de-lever if cash flow is available. While
the company is not actively selling assets, it has significant flexibility
to reduce debt from asset sale proceeds.
Moody's expects the company's quarterly LTM results to improve
sequentially through 2005. With the US$401 million August
2005 debt maturity being refinanced, Abitibi's liquidity position
will improve. In the interim, notwithstanding Abitibi's capital
markets' access and ability to execute the refinance, the existing
SGL-4 score indicating weak liquidity will remain.
The company maintains a C$816 million revolver that is largely
un-drawn and a US$500 million accounts receivable securitization
vehicle that is generally more fully utilized. The bank facility
matures in June 2006. Moody's views it as adequate back-up
for the approximately C$400-to-C$500 million
in outstanding receivables' financing. However, with such
a large proportion of the bank facility backing up the receivables facility,
Abitibi has little capacity to use the bank facility to assist with repaying
long term debt maturities in advance of cash flow from operations being
available. Abitibi is in compliance with its key financial covenants
(Maximum Debt-to-Capitalization (65.8% actual
at December 31, 2004 versus 70% threshold), and Minimum
Interest Coverage (2.1x actual versus 1.25x threshold;
threshold increases to 1.50x for each quarter-end in 2005,
and 1.75x thereafter)). Moody's estimates that Abitibi could
access the entire unused amount of the credit facility without violating
its Debt-to-Capitalization covenant. While the company
is expected to be modestly Free Cash Flow positive in 2005, it may
not turn a profit. Consequently, the cushion relative to
this test may not be as great going forward. However, so
long as Abitibi is not required to make material adjustments to the carrying
value of certain assets (idled assets whose carrying value has not been
written-off), and so long as additional price increases are
realized during the course of the year, Abitibi should be able to
manage this figure so that compliance is maintained. With Cash
Flow from Operations expected to display sequential improvement over the
next several quarters, Moody's also expects the Interest Coverage
test cushion to increase through 2005.
The outlook is negative, and reflects Moody's assessment of
the challenges facing the company in normalizing the relationship between
its debt load and its cash flow at the Ba3 rating level. The North
American newsprint market is characterized by declining demand,
and is in the midst of a protracted restructuring with participants removing
capacity in order to better balance supply with demand. However,
the sustainability of the pricing impact of supply management initiatives
is not yet proven. For a given level of demand, Moody's
is skeptical that consumers will accept pricing increases as a result
of input price or exchange rate induced cost-push pressures.
In the context of gradually declining demand, and with the potential
of slowing economic growth, it is not certain that margins can be
expanded on a sustainable basis, and consequently, margins
may remain under significant pressure. Accordingly, Moody's
is concerned that difficult North American market fundamentals may cause
current commodity pricing to be representative of near peak levels.
Therefore, while Moody's expects Abitibi's 2005 results
to show improvement over the dismal results posted for the past three
years, the magnitude and sustainability of the improvement are uncertain.
There are also risks that decreases in North American demand may yet again
accelerate, or that the company's relative cost position will be
further eroded by appreciation of the Canadian dollar, both of which
would augment the required debt-to-cash flow adjustments.
Moody's expectations for a Ba3 rating include average through-the-cycle
RCF in excess of 10%, with the related FCF measure in excess
of 5%. Note that Moody's debt figures include adjustments
for off-Balance Sheet Accounts Receivable securitization vehicles.
Moody's also accounts for operating leases and unfunded pensions,
and while these are not included in the above figures, they do contribute
incremental leverage that must be assessed. As noted above,
Abitibi has a significant pension funding deficit that adds to leverage.
Also as noted above, until conclusive evidence of the benefits of
the market structure revisions the company is leading is observed on a
sustained basis, a ratings upgrade is unlikely. The most
positive near-to-mid term rating action would involve the
outlook being revised to stable from negative. In absence of near
term progress in permanently improving credit metrics, or in the
event either or both of 2005 results and expectations for 2006 do not
show dramatic improvement over the recent past, a ratings downgrade
becomes more likely. A downgrade would also result from significant
debt-financed acquisition activity or were liquidity arrangements
to deteriorated significantly.
Abitibi-Consolidated Inc., headquartered in Montreal,
Quebec, is North America's leader in newsprint and uncoated mechanical
paper and also has a significant lumber business.
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
No Related Data.
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