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Rating Action:

Moody's Affirms Georgia-Pacific Corporation’s Ratings: Senior Implied Rating – Ba2; Outlook Changed to Stable from Negative

14 Apr 2004
Moody's Affirms Georgia-Pacific Corporation’s Ratings: Senior Implied Rating – Ba2; Outlook Changed to Stable from Negative
Toronto, April 14, 2004 -- Moody's Investors Service affirmed Georgia-Pacific Corporation’s (“GP”) ratings (Senior Implied Ba2; Issuer Ba3 and Senior Unsecured Ba3) and changed the rating outlook to stable from negative. Similarly, the outlooks for Fort James Corporation, G-P Canada Finance Company and Fort James Operating Company were changed to stable from negative, with the applicable senior unsecured ratings for those entities affirmed at Ba2, Ba3 and Ba2 respectively. Moody’s also affirmed GP’s Speculative Grade Liquidity Rating as SGL-3.

The stable outlook reflects the debt reduction benefits from pending asset divestitures, combined with maintenance of adequate liquidity. In the context of a slightly more stable and profitable business platform resulting from divesting the volatile pulp and the low margin building products distribution segments, this lower debt level better balances positive versus negative influences. In aggregate, GP’s ongoing cash flow generating capability has not yet reached the potential that management foresees, and credit metrics continue to be representative of the current rating. Going forward, both positive and negative influences are present. On the positive side, management anticipates improved profit margins to result from the ongoing exercise to reposition the consumer products’ offering to come to fruition over the next several quarters, and there appears to be positive momentum in the tissue market with the three major North American participants having recently announced price increases. As well, after many quarters of poor results, the paper and packaging segments are showing signs of cyclical turn around. Off-setting these positive influences, and given continued over-supply in the tissue market, is the potential that it may continue to be very difficult to improve profitability in the consumer products segment. As well, recent positive results in the building products segment may be susceptible to a near term cyclical decline, and recent announcements by other participants in the packaging sector suggest that despite intense input cost pressure, over-capacity has continued to retard progress in improving margins. Further, GP continues to pay for asbestos related liabilities, and faces a funding shortfall in its pension liabilities that must be addressed over time. On balance over the near term and accounting for debt reduction from the divestitures, credit protection measures are not expected to vary significantly from recent observations.

Georgia-Pacific Corporation:

Ratings affirmed:

Senior Implied: Ba2

Issuer Rating: Ba3

Senior Unsecured: Ba3

Speculative Grade Liquidity Rating: SGL-3

Outlook changed: To stable from negative


Fort James Corporation:

Rating affirmed:

Senior Unsecured: Ba2

Outlook changed: To stable from negative


G-P Canada Finance Company:

Rating affirmed:

Backed Senior Unsecured: Ba3

Outlook changed: To stable from negative


Fort James Operating Company:

Rating affirmed:

Backed Senior Unsecured: Ba2

Outlook changed: To stable from negative

The rating assessment is based on GP’s continued high financial leverage. Even after accounting for the impact of pending asset divestitures, GP’s credit protection metrics remain at relatively low levels. Pro forma for the asset divestitures and related debt reduction, Moody’s estimates that year-end Debt-to-Capitalization would have been approximately 64%, and that RCF for the fiscal year-ending January 4, 2004 would have been 11% of Debt. Pro forma EBIT-to-Sales is estimated to have been 7%. In comparison to the peer group, these measures continue to support the Ba2 senior implied rating. As noted above, while management is optimistic of improving on these results in 2004, there are risks related to improving cash flow from operations to the extent that would warrant further rating action.

While there are risks that warrant caution with respect to the upside, it appears that downside risks are contained such that it does not appear likely that cash flow and debt protection measurements will deteriorate materially from the levels estimated by Moody’s pro forma figures noted above. Accordingly, the outlook is stable. Access to financial liquidity, while considered adequate by Moody's, has been supported by asset sales. In the absence thereof, GP’s access to its credit facilities may have been constrained. The company’s credit facility, which matures in late 2005, includes financial covenants that become more restrictive over time. In the absence of improved financial performance to assure covenant compliance, the covenant levels may have to be renegotiated. With the pending asset divestitures and relatively short-dated term to maturity, it is likely that GP will be looking to renegotiate the terms of its credit facility in any case. Recent capital markets activity has been very supportive of GP, with bond terms and pricing that approach investment grade comparables. In combination with current favorable bank market conditions, this bodes well for GP’s prospects to successfully renegotiate its lines of credit.

During 2003, GP took steps to smooth out its debt maturity profile, and thus far in 2004, has initiated four separate debt redemption actions to further manage its maturity profile. The current portion of long term debt at January 4, 2004 was $789 million, an amount that should easily be addressed given pending asset sale proceeds (net after-tax proceeds of approximately $780 million from the second quarter sale of the Building Products distribution business and $535 million of after tax proceeds from the sale of market pulp operations (see below for further details)).

While the company’s debt goal of $8 billion in debt appears to be within reach ($10.6 billion at Y/E 2003 ($9.8 billion pro forma for the asset divestitures)), cash flow generation and profit margins are not at levels that would support an upgrade. However, a ratings upgrade could be considered if: i) EBIT-to-Sales and RCF-to-Debt ratios improve to levels that are, in Moody’s view, sustainable through the commodity price cycle in excess of 10% and 15% respectively, ii) the company’s asbestos liability stabilizes or is permanently eliminated, and iii) the company maintains continued access to adequate liquidity.

Alternatively, were these financial measures to deteriorate significantly, or were there to be a significant set-back with asbestos or pension funding, the rating and outlook would be susceptible to downgrade. Similarly, and while given the company’s focus on debt reduction Moody’s does not anticipate that GP would consider a material acquisition, a significant debt-financed acquisition would also create circumstances where the rating would be reviewed for downgrade. So too would a material decrease in access to liquidity.

Georgia-Pacific Corporation, headquartered in Atlanta, Georgia, is a global leader in tissue and other consumer products, and has significant operations in building products, packaging and fine paper.


New York
Mark Gray
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653


Toronto
Bill Wolfe
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
1.416.214.1635



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