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Rating Action:

Moody's downgrades Abitibi's and Bowater's ratings

18 Mar 2008
Moody's downgrades Abitibi's and Bowater's ratings

Approximately $5 billion of rated debt instruments affected

New York, March 18, 2008 -- Moody's Investors Service downgraded the corporate family ratings of AbitibiBowater Inc.'s (AbitibiBowater) subsidiaries Abitibi-Consolidated Inc. (Abitibi) and Bowater Incorporated (Bowater) to Caa1 from B2. The rating action results from AbitibiBowater's deteriorating liquidity profile, the anticipated challenges associated with the company's recently announced $1.4 billion refinancing plan and weakened credit protection measures. At the same time, Moody's downgraded the probability-of-default rating of Abitibi to Caa3 from B2 and the probability-of-default rating of Bowater to Caa1 from B2. Moody's assigned a B1 rating to the new US$415 million secured notes due 2011 at Abitibi and downgraded the senior unsecured ratings for bonds and debentures issued by Abitibi and Bowater to Caa2 from B3. In addition, Abitibi's and Bowater's speculative grade liquidity ratings were downgraded to SGL-4 and SGL-3 respectively from SGL-2. The rating outlooks for Abitibi and Bowater are negative.

The ratings of Abitibi reflect the company's weakened liquidity profile and the anticipated challenges of completing the company's recently announced exchange offer whereby the company has offered to exchange the 6.95% notes of Abitibi due April 1, 2008, the 5.25% Notes of Abitibi-Consolidated Company of Canada due June 20, 2008, and the 7.875% notes of Abitibi due August 1, 2009 (the affected notes) in a private placement for a combination of cash and new 15% notes due 2010 to be issued by Abitibi-Consolidated Company of Canada. Moody's considers the exchange offer to be occurring under distressed circumstances and upon the completion of the exchange, would downgrade Abitibi's probability-of-default rating on the affected notes to LD from Caa3 reflecting a limited default.

The ratings of Abitibi and Bowater also reflect their weak operating performance, negative free cash flow and high debt levels from past debt-financed acquisitions. The ratings incorporate declining demand for newsprint, deteriorating markets for their sawmill operations, rising input costs (especially in eastern Canada), the strong Canadian dollar, and a weakened liquidity profile. Positive factors that support the ratings include AbitibiBowater's large scale as the largest newsprint producer in the world, which provides flexibility to reduce costs, the potential to realize a large portion of the $375 million of identified synergies, and cost-competitive operations. It is noted that even as newsprint consumption continues to decline in 2008 owing to rising substitution by electronic media and the slowing US economy, the newsprint capacity reductions by AbitibiBowater and its competitors should provide support to the price increases implemented in the first quarter of 2008. Some improvement in cash flow generation should be observed as the effects of price increases work their way through the company's results.

The speculative grade liquidity ratings for Abitibi and Bowater result from minimal availability under each company's respective credit facilities, and expectations that cash flow will be slightly negative to neutral over the next four quarter SGL time horizon. The weaker SGL rating for Abitibi reflects the scheduled debt maturity of $346 million in the next quarter and the limited cash and credit availability of approximately $100 million. The SGL ratings also incorporate the expectation that financial covenant compliance may become a problem should the company prove unsuccessful in extending an expiring waiver or financial performance fails to improve materially in the next few quarters. Moody's believes that AbitibiBowater has some alternative liquidity potential with the ability to sell certain non-core assets including the company's hydro assets, timberlands and operating assets in the UK and South Korea. In addition, the company expects to receive approximately US$160 million in cash proceeds in the second quarter of this year from the recent sale of the Snowflake, Arizona newsprint mill to Catalyst Paper Corporation.

The negative outlook reflects the potential for further downward ratings adjustment should the refinancing plan fail to be completed in the amounts and in the timeframe required to address Abitibi's debt maturities. The negative rating outlook also reflects expectations that AbitibiBowater's liquidity profile will be at risk should declining newsprint demand, the strong Canadian dollar and rising input costs offset the expected improved financial results from the newsprint price increases implemented since November 2007.

Downgrades:

..Issuer: Abitibi-Consolidated Company of Canada

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2, LGD4-62% from B3, LGD4-57%

....Senior Unsecured Shelf, Downgraded to (P)Caa2 from (P)B3

..Issuer: Abitibi-Consolidated Finance L.P.

....Multiple Seniority Shelf, Downgraded to (P)Caa2 from (P)B3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2, LGD4-62% from B3, LGD4-57%

..Issuer: Abitibi-Consolidated Inc.

....Probability of Default Rating, Downgraded to Caa3 from B2

....Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-2

....Corporate Family Rating, Downgraded to Caa1 from B2

....Multiple Seniority Shelf, Downgraded to (P)Caa2 from (P)B3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2, LGD 4-62% from B3, LGD4-57%

..Issuer: Bowater Canada Finance Corp.

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2, LGD4-61% from B3, LGD4-60%

..Issuer: Bowater Incorporated

....Probability of Default Rating, Downgraded to Caa1 from B2

....Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2

....Corporate Family Rating, Downgraded to Caa1 from B2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2, LGD4-61% from B3, LGD4-60%

..Issuer: Maine Finance Authority

....Senior Unsecured Revenue Bonds, Downgraded to Caa2, LGD4-61% from B3, LGD4-60%

..Issuer: McMinn (County of) TN, I.D.B.

....Senior Unsecured Revenue Bonds, Downgraded to Caa2, LGD4-61% from B3,LGD4-60%

..Issuer: York (County of) SC

....Senior Unsecured Revenue Bonds, Downgraded to Caa2, LGD4-61% from B3,LGD4-60%

Assignments:

..Issuer: Abitibi-Consolidated Company of Canada

....Senior Secured Regular Bond/Debenture, Assigned B1, LGD1-08%

Outlook Actions:

..Issuer: Abitibi-Consolidated Company of Canada

....Outlook, Changed To Negative From Developing

..Issuer: Abitibi-Consolidated Finance L.P.

....Outlook, Changed To Negative From Developing

..Issuer: Abitibi-Consolidated Inc.

....Outlook, Changed To Negative From Developing

..Issuer: Bowater Canada Finance Corp.

....Outlook, Changed To Negative From Developing

..Issuer: Bowater Incorporated

....Outlook, Changed To Negative From Developing

Headquartered in Montréal, Québec, with a regional office in Greenville, South Carolina, AbitibiBowater is North America's leader in newsprint and commercial printing papers. The company also produces lumber and market pulp. The company was formed from the merger of Abitibi and Bowater in October 2007. AbitibiBowater owns or operates 27 paper and pulp facilities (excluding the Snowflake, Arizona newsprint mill) and 35 wood products facilities located in the United States, Canada, the United Kingdom and South Korea.

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

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