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Rating Action:

Moody's Changes International Paper's Ratings' Outlook to Negative and Affirms Ratings (Baa2/Prime-2)

27 Apr 2004
Moody's Changes International Paper's Ratings' Outlook to Negative and Affirms Ratings (Baa2/Prime-2)

Approximately $13 Billion of Debt Securities Affected

Toronto, April 27, 2004 -- Moody's Investors Service affirmed the Baa2 senior unsecured debt ratings and Prime-2 short term rating of International Paper Company ("IP"), but changed the outlook to negative from stable. The change in outlook follows IP's announcement that it will acquire Box USA Holdings, Inc., ("Box USA" - Senior implied B3), and reflects Moody's related concerns that IP's focus on debt reduction may be waning and the nascent recovery commodity prices may not be sufficiently robust to allow IP's financial performance to support the current ratings over the intermediate term.

Outlook: to Negative from Stable

Ratings Affirmed:

International Paper Company:

Senior Unsecured Baa2

Subordinate Shelf (P) Baa3

Preferred Shelf (P) Ba1

Commercial Paper P-2

International Paper Capital Trust IV:

Bkd Preferred Shelf (P) Ba1

International Paper Capital Trust VI:

Bkd Preferred Shelf (P) Ba1

International Paper Capital Trust III:

Bkd Preferred Shelf Baa3

Champion International Corporation:

Senior Unsecured Baa2

Federal Paper Board Co., Inc.

Senior Unsecured Baa2

Union Camp Corporation:

Senior Unsecured Baa2

IP's ratings continue to be based on its position as the world's largest paper company and its broad product and geographic diversification. IP has superior access to the capital markets and has significant cost-enhancing backwards integration into (valuable) timberlands. Financial liquidity is good. At the quarter-ended March 31, IP held cash of $2.0 billion, had no commercial paper outstanding, and no drawings under either its $2.0 billion revolving credit facilities or $650 million accounts receivable securitization facilities.

However, the ratings also account for IP's significant debt burden and historically aggressive acquisition policy. After a three year acquisition moratorium, IP may infer that the unfolding commodity price recovery provides greater financial flexibility with which to pursue growth opportunities. However, in the context of a Baa2 senior unsecured rating, IP's current debt level is quite high in relation to cash flow, and while business conditions are improving, the over-hang of excess capacity may limit the upside to commodity price appreciation and margin expansion.

Moody's believes that IP is generally an average cost producer in a global context, but has a better than average cost structure in comparison to North American competitors. Since many of its products are globally traded, the company therefore requires moderately higher pricing and continued cost reductions to generate acceptable margins and debt protection measures. IP continues a company wide "non-price improvement" initiative to improve margins and improve profitability relative to its competitors. However, elevated prices for raw materials and energy, increasing pension expenses, and ongoing product liability expenses have partially frustrated this effort and are expected to provide an ongoing challenge.

The negative ratings' outlook reflects two key factors. Firstly, in conjunction with recent refinance activities, the Box USA acquisition suggests that rather than applying accumulated cash flow against debt, IP may pursue its growth objectives with cash being used in lieu of or to augment incremental debt. Secondly, 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 IP's through-the-cycle profit margins and credit protection metrics may not reflect the existing rating. For a company of IP's ratings' stature (at the Baa2/Prime-2 ratings level), 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%. Over the intermediate term and in the absence of significantly reducing debt, IP will need to improve its through-the-cycle performance to meet these thresholds and retain the Baa2/Prime-2 ratings.

The outlook could be returned to stable if IP takes specific proactive steps to reduce indebtednes or improves operating performance so as to be able to achieve the above-noted performance metrics. The ratings could be reduced if risks related to the market recovery come to fruition and IP continues not to proactively reduce debt or if the company pursues material debt-financed acquisitions.

Mark Gray
Managing Director
Corporate Finance Group

Toronto
Bill Wolfe
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

No Related Data.
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