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Rating Action:

Moody's confirms Clearwater Paper's Ba2 CFR and assigns Ba3 to proposed notes

10 Oct 2010

$500 Million of Debt Securities Affected

Toronto, October 10, 2010 -- Moody's Investors Service confirmed Clearwater Paper Corporation's (Clearwater) Ba2 corporate family rating and the Ba3 rating on the company's existing senior notes. At the same time Moody's assigned a Ba3 rating to Clearwater's proposed $350 million senior note offering. Proceeds from the new debt offerings will be used to fund, in part, the acquisition of Cellu Tissue Holdings Inc. (Cellu Tissue, B1/Stable). The rating confirmation concludes a review initiated on September 16, 2010, following the company's announcement that it had signed a definitive agreement to acquire Cellu Tissue for $502 million. The transaction is expected to close before the end of the year. The rating outlook is stable and the company's speculative liquidity rating has been lowered to SGL-2 from SGL-1.

RATINGS RATIONALE

The ratings confirmation is primarily supported by Clearwater's strong financial performance and liquidity that gives it the ability to absorb both the Cellu Tissue acquisition and finance the construction of its previously announced $260 - $280 million tissue machine and converting facilities in Shelby, North Carolina. The all-debt financing of the acquisition is expected to leave Clearwater with reasonable leverage (2.6x pro forma for the twelve months ended June 30, 2010, including Moody's standard analytical adjustments). Moody's believes that the company's cash position, availability under the company's committed revolving credit facility and anticipated free cash flow generation will be sufficient to finance the construction of the Shelby, North Carolina facility.

Clearwater's Ba2 corporate family rating reflects the company's significant position as one of the leading producers of private label tissue products and the expectation of continued stable operating and financial performance after the acquisition of Cellu Tissue. The benefits of the combined operating platform and customer mix should help Clearwater's return and volatility measures, but these benefits are partially offset by the diminished financial flexibility associated with company's more levered financial position. With the increase in debt load and the build-out of the company's new North Carolina tissue mill, Clearwater is expected to generate weaker leverage and coverage metrics over the next two years. Despite the enhanced presence in the more stable tissue segment, the combined company will have a significantly greater exposure to the volatile purchased market pulp market, which may suppress margins during periods of cyclically high pulp prices.

We view the announced acquisition of Cellu Tissue as positive. Clearwater's pre-acquisition credit metrics were strong for the Ba2 rating category. Stable operating conditions in both the tissue and packaging segment, as well as cash receipts from the recent black liquor fuel tax credit has resulted in strong liquidity and credit risk measures. With the Cellu Tissue acquisition, we expect the company will be able to maintain leverage (adjusted debt to EBITDA) at or below 3.5x and retain cash flow to adjust debt close to 20% over the next 12 to 18 months. The acquisition should provide Clearwater the ability to decrease its dependence on a few large customers and partially offset the company's risks associated with operating a limited number of mill sites. It will further supplement Clearwater's national sales footprint with a national manufacturing base that should provide significant logistical improvements through shipping and transportation synergies. Partially offsetting these positives, Clearwater's financial leverage is expected to increase and Clearwater's liquidity will decline as cash on hand is used to partially fund the acquisition and finance the construction of the North Carolina tissue mill. In addition, the acquisition is expected to significantly increase the company's exposure to the volatile purchased market pulp market. The acquisition is expected to close in the fourth quarter of 2010 and is subject to customary closing conditions. Assuming the transaction closes as anticipated, Cellu Tissue's existing working capital facility and senior secured notes will likely be repaid and all of Moody's ratings of that entity withdrawn.

The stable ratings outlook reflects Moody's expectations that Clearwater will be able to sustain acceptable credit protection metrics for its rating given the company's liquidity, leverage and stable product offering.

The SGL-2 liquidity rating indicates good liquidity supported with approximately $125 million in cash (post acquisition of Cellu Tissue and related financing), unused committed lines of $123 million (through a $125 million revolving credit facility that matures in November 2012) and Moody's expectations of approximately $60 million of cash burn over the next four quarters after the acquisition closes as the company builds its new North Carolina tissue facility.

Downgrades:

..Issuer: Clearwater Paper Corporation

....Speculative Grade Liquidity Rating, Downgraded to SGL-2 from SGL-1

Upgrades:

..Issuer: Clearwater Paper Corporation

....Senior Unsecured Regular Bond/Debenture, Upgraded to LGD4, 61% from LGD4, 67%

Assignments:

..Issuer: Clearwater Paper Corporation

....Senior Unsecured Regular Bond/Debenture, Assigned a range of 61 - LGD4 to Ba3

Outlook Actions:

..Issuer: Clearwater Paper Corporation

....Outlook, Changed To Stable From Rating Under Review

Confirmations:

..Issuer: Clearwater Paper Corporation

....Probability of Default Rating, Confirmed at Ba2

....Corporate Family Rating, Confirmed at Ba2

....Senior Unsecured Regular Bond/Debenture, Confirmed at Ba3

Moody's last rating action was on September 16, 2010 when the company ratings were put on review following the company's announcement that it had signed a definitive agreement to acquire Cellu Tissue.

The principal methodology used in rating Clearwater Paper Corporation was the Moody's Global Paper and Forest Products Industry Rating Methodology published in September 2009 . Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Headquartered in Spokane Washington, Clearwater is a producer of bleached paperboard for the high-end segment of the packaging industry and a leading producer of private label tissue products sold in grocery stores in the United States. The company had revenues of approximately $1.3 billion (LTM June 30, 2010) of which approximately 57% was from the company's pulp and paperboard segment and 43% was from the consumer products segment.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

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

New York
Steven Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Canada Inc.
70 York Street
Suite 1400
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Canada

Moody's confirms Clearwater Paper's Ba2 CFR and assigns Ba3 to proposed notes
No Related Data.
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