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Rating Action:

Moody's rates Tembec's senior secured notes B3; assigns B3 CFR

Global Credit Research - 09 Aug 2010

Approximately US$250 million of rated debt affected

Toronto, August 09, 2010 -- Moody's Investors Service (Moody's) assigned Tembec Industries Inc. (Tembec) proposed senior secured note offering a B3 rating and assigned the company a corporate family rating (CFR) of B3, and a liquidity rating of SGL-2. The outlook is stable.

Tembec's B3 CFR reflects the company's significant exposure to the highly volatile market pulp and wood products industry segments, the company's exposure to the strength of the Canadian dollar as well as the volatility of input costs. Execution risks in management's focus on cost reduction and asset-base rationalization are also considered, including the potential for significantly higher capital expenditures as the company attempts to extract operational improvements from certain high-cost assets. Factors supporting the rating include the company's good liquidity position and the diversification provided by material operations in several different sectors. Despite the product diversity, earnings and cash flow are expected to remain quite volatile given the inherent volatility of the sectors that Tembec operates in.

The proposed notes are senior secured obligations of Tembec and are rated B3, consistent with the corporate family rating. The proceeds from the proposed note offering (plus a portion of the company's cash position) will be used to repay the company's existing senior secured term loan. The proposed notes and related guarantees will be secured on a first priority basis by most of the Canadian assets of the company and will have a second priority lien on the current assets that currently secure the company's asset-based revolving credit facility.

Tembec's SGL-2 rating reflects the company's good liquidity position. The company's liquidity is supported by approximately CDN$60 million of cash (June 2010 pro forma for the anticipated repayment of the company's existing senior secured term loan), net availability of approximately CND$70 million on the company's undrawn committed US$205 million asset-based revolving credit facility (net of borrowing base eligibility, availability block and approximately CND$35 million of letter of credit use) that matures in December 2011 and CND$25 million from the company's evergreen receivable factoring agreement. Moody's estimates modest internally generated cash flow over the next 12 months. Covenant issues are not expected over the near term.

The stable rating outlook reflects Moody's expectation that Tembec will be able to maintain adequate liquidity and sustain acceptable credit protection metrics through the anticipated volatile industry conditions.

Future upward migration for Tembec's rating would depend on a sustained improvement in the company's financial performance. Quantitatively, this could result if normalized RCF/TD and (RCF-Capex)/TD measures approach 10% and 5%, respectively, on a sustainable basis, while maintaining good liquidity.

Tembec's ratings could face downward ratings pressure if pulp market conditions deteriorate suddenly leading to a significant deterioration in liquidity arrangements. Quantitatively, this would occur if normalized (RCF-Capex)/TD measures drop below 0%.

Assignments:

..Issuer: Tembec Industries Inc.

....Senior Secured Regular Bond/Debenture, Assigned a range of 44 - LGD3 to B3

Reinstatements:

..Issuer: Tembec Industries Inc.

....Probability of Default Rating, Reinstated to B3

....Speculative Grade Liquidity Rating, Reinstated to SGL-2

....Corporate Family Rating, Reinstated to B3

Outlook Actions:

..Issuer: Tembec Industries Inc.

....Outlook, Changed To Stable From Rating Withdrawn

This is a new rating assignment to Tembec. Ratings on the company were withdrawn subsequent to the completion of the company's recapitalization in February 2008.

The principal methodology used in rating Tembec was the Moody's Global Paper and Forest Products Industry Rating Methodology, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Montreal, Quebec, Tembec is an integrated paper and forest products company with operations primarily in Canada and a mill in France. The company's main operating segments include market pulp, wood products and paper.

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
Toronto, ON M5J 1S9
Canada

Moody's rates Tembec's senior secured notes B3; assigns B3 CFR
No Related Data.
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