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Rating Action:

Moody's downgrades Resolute's CFR to B1; outlook negative

20 Apr 2020

Approximately $375 million of rated debt

Toronto, April 20, 2020 -- Moody's Investors Service, ("Moody's") downgraded Resolute Forest Products Inc.'s ("Resolute") corporate family rating (CFR) to B1 from Ba3, probability of default rating (PDR) to B1-PD from Ba3-PD, senior unsecured bond rating to B2 from B1 and speculative grade liquidity rating to SGL-2 from SGL-1. The rating outlook was changed to negative from stable.

"The rating action reflects weaker than anticipated financial performance and the potential that Resolute's high leverage will remain elevated over the next year with the accelerated decline in paper demand and expectations that lumber and pulp markets will remain challenged for longer than previously envisaged," said Ed Sustar, Senior Vice President with Moody's.

Downgrades:

..Issuer: Resolute Forest Products Inc.

.... Corporate Family Rating, Downgraded to B1 from Ba3

.... Probability of Default Rating, Downgraded to B1-PD from Ba3-PD

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

....Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD4) from B1 (LGD4)

Outlook Actions:

..Issuer: Resolute Forest Products Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Resolute's B1 CFR rating is constrained by: (1) its high leverage coming into 2020 that will remain elevated through the year (Debt/EBITDA of 13x in 2019, after lumber export duties and including the company's large unfunded pension liabilities and other Moody's adjustments); (2) the inherent price volatility of its products (most are currently well below normalized levels); and (3) the company's significant exposure to the secular decline of newsprint and specialty papers, which represents almost 50% of its revenue. Resolute benefits from: (1) end-market and product diversity through paper (with 11 newsprint and specialty paper mills), lumber (16 sawmills following the recent acquisition of three sawmills from Conifex Timber Inc, plus three other wood product facilities), commodity pulp (five pulp mills), and tissue (three tissue facilities); (2) integrated North American operations; (3) a growing tissue business; and (4) good liquidity.

Resolute's 2019 leverage of 13x was 9x before lumber export duties. Moody's expects these duties ($162 million paid through December 2019) will likely be largely refunded, as they have been in the past, if and when a new softwood lumber agreement is reached between Canada and the US.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The paper and forest product industry is affected by this shock given its sensitivity to consumer demand and sentiment. However, in most jurisdictions, the paper and forest products industry has been deemed an essential service. This designation allows Resolute to continue to supply products used in the food and beverage industry, infrastructure and construction projects as well as the manufacture of fiber-based personal hygiene products such as tissue products, breathing masks and medical gowns. Nonetheless, the impact on Resolute's credit profile could leave it vulnerable to shifts in market sentiment in these unprecedented operating conditions as the outbreak continues to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Resolute of the breadth and severity of the shock, the broad deterioration in credit quality it has triggered, and high-level lingering uncertainty.

Resolute has good liquidity (SGL-2), with about $400 million of sources (pro forma for the Feb 2020 acquisition of three sawmills from Conifex for $175 million) to cover $30 million of uses over the next four quarters. The company's sources of liquidity include $3 million of cash (December 2019) and combined availability of $400 million under its $500 million asset-based revolving credit facility (ABL) that matures in May 2024 and its $180 million secured revolving credit facility that matures October 2025 (net of borrowing base and springing covenant restrictions, drawings and letter of credit use). Moody's expects that Resolute will consume about $30 million of cash over the next four quarters including about $125 million of required pension contributions and $60 million of lumber export duties. Resolute does not have any significant debt maturities until May 2023.

The negative outlook reflects our expectation that leverage will remain high and could remain elevated in 2021 if lumber and pulp prices do not return towards normalized levels (partially offset by Resolute's growing tissue business). The expected weakness in commodity markets could further constrain the company's cash flow and liquidity position.

As a manufacturing company, Resolute is exposed to environmental risks, such as air and water emissions, and social risks, such as labor relations, health and safety issues, and changing consumer trends (which includes the accelerated preference for digital alternatives such as electronic readers instead of newspapers). The company has established expertise in complying with these on-going risks, and has incorporated procedures to address them in their operational planning and business models. Governance risks are moderate, as Resolute is a public company with transparent reporting. Although Resolute does not have a public leverage target, we expect that the company will direct most of their free cash flow, when generated, towards debt reduction, as current leverage is significantly above the company's normal levels.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade

» The company improves its diversification such that most of its EBITDA is generated by products other than newsprint and specialty papers (currently about 60%)

» Adjusted debt/EBITDA declines below 4.5x (13x as of December 2019) based on our forward opinion of sustainable metrics

» (RCF-capex)/adjusted debt above 5% (-0.5% as of December 2019) based on our forward opinion of sustainable metrics

Factors that could lead to a downgrade

» Sustained deterioration in the company's operating environment or liquidity

» Adjusted debt/EBITDA is sustained above 5.5x (13x as of December 2019) based on our forward opinion of leverage

» Free cash flow generation expected to remain negative for a sustained period of time

The B2 rating on the company's $375 million senior unsecured notes is a notch below the CFR, reflecting the note holders' subordinate position behind the secured $500 million asset-based revolving credit facility (unrated) and $380 million of senior secured credit facilities (unrated).

The principal methodology used in these ratings was Paper and Forest Products Industry published in October 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1105007. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Montreal (Quebec, Canada), Resolute produces newsprint, specialty paper (mainly mechanical grades of paper), market pulp, lumber and tissue. Net sales for the last twelve months ending December 2019 were $3 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating outcome announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ed Sustar
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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