Moody’s Affirms Weyerhaeuser Company’s Baa2/Prime-2 Ratings and Stable Outlook
Toronto, May 03, 2004 -- Moody's Investors Service affirmed the debt ratings and outlook of Weyerhaeuser Company (“Weyco”) at Baa2/Prime-2 stable. The action follows Weyco’s announcement that it will issue a substantial amount of equity, expected to be between $850-and-$950 million net of fees and expenses. Proceeds are anticipated to be used to reduce debt, thereby augmenting the company’s ongoing debt reduction efforts. While Moody’s has noted concern over the magnitude and sustainability of the nascent commodity price recovery, and there is consequent uncertainty with respect to the mid-to-long term financial performance of most companies in the paper and forest products sector, Weyco’s proactive management of its debt position is a positive step towards ensuring that debt protection measures will be consistent with the existing ratings.
Outlook Affirmed: Stable
Issuer Rating Baa2
Senior Unsecured Rating Baa2
Commercial paper Rating P-2
Willamette Industries, Inc.:
Bkd Senior unsecured Baa2
MacMillan Bloedel Limited:
Bkd Senior Unsecured Baa2
Weyerhaeuser Real Estate Company:
Bkd Commercial Paper P-2
Weyco’s ratings continue to be based on its position as a substantial enterprise with broad product and geographic diversification. Weyco has superior access to the capital markets and has significant cost-enhancing backwards integration into (valuable) timberlands. Financial liquidity, in the form of a $2.5 billion revolving line of credit (un-drawn at this time), is good.
However, the ratings also account for Weyco's significant residual debt burden from the 2002 acquisition of Willamette Industries. In the context of a Baa2 senior unsecured rating, Weyco's current debt level is quite high in relation to cash flow. While business conditions are improving, the over-hang of excess capacity may limit the upside to commodity price appreciation and margin expansion in the key packaging and fine paper markets. This situation is exacerbated by stress on input prices. Weyco also faces the possibility of very significant damages resulting from the Paragon breach of contract matter. Lastly, while Moody's does not anticipate Weyco to be acquisitive in the near term, there is also the potential that once the company’s financial position is regularized, it will look to satisfy growth aspirations by engaging in acquisitions.
The stable ratings’ outlook reflects a balance of factors. Firstly, in conjunction with recent debt reduction efforts, the pending equity offering substantiates Weyco’s commitment to proactively managing its debt levels. Moody’s also expects the company to continue to reduce debt with cash flow from operations. In 2004, that cash flow should be stronger as the pulp market enjoys increasing prices. As well, sales of non-core assets should serve to supplement cash flow from operations.
Moody’s has previously noted there are risks related to the magnitude and sustainability of the recovery in paper and forest products’ commodity prices, and consequently, there is concern that many companies in the paper and forest products sector may have difficulty generating profit margins and credit protection measurements reflective of their existing ratings. For a company of Weyco’s ratings’ stature, Moody’s expects to observe through-the-cycle Retained Cash Flow-to-Debt of more than 20%, with the commensurate Free Cash Flow-to-Debt figure being in excess of 10%. Weyco’s proactive debt reduction increases the likelihood that intermediate term and through-the-cycle performance will meet these Baa2/P-2 thresholds.
The outlook could be changed to positive if Weyco takes additional specific steps to reduce indebtedness so as to provide greater certainty that the above-noted performance metrics can be exceeded. Either or both of the outlook or the ratings could be reduced if risks related to the market recovery come to fruition or if the company pursues material debt-financed acquisitions.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
Corporate Finance Group
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