DBRS Confirms Norske Skogindustrier ASA at BBB (low)p

Dominion Bond Rating Service (“DBRS”) has today confirmed the rating for Norske Skogindustrier ASA (“NSG” or the “Company”) at BBB (low)p. The trend is Stable.

The financial profile of NSG, one of the largest global producers of newsprint/groundwood specialties, moderately improved over the past year, but its balance sheet remains highly leveraged. Competitive industry conditions have pressured profitability over the past three years. Poor market conditions for newsprint and magazine papers in Europe (the Company’s dominant market) and weak newsprint markets in North America and Asia were the primary reasons for the earnings decline.

Slowly recovering European newsprint and magazine paper markets will continue to constrain earnings and cash flow. Weak market conditions are also expected to persist in North America and Korea in the near term, and further strengthening of the Norwegian krone (NOK) could also reduce earnings. Despite weak short-term market conditions, profitability will be positively impacted by the start-up of a new, 50% owned newsprint mill in China in 2005.

Total debt remains at high levels for a cyclical company, despite debt reduction from forest land and power generation asset divestitures in 2003 and 2004. However, NSG has sufficient liquidity (undrawn credit facilities of NOK6.6 billion at year-end 2004) to repay liabilities as they come due.

DBRS notes that despite a negative short-term outlook, the following five positive factors provide NSG with the capability to substantially increase cash flow, pay down debt in the next cyclical upturn, and support an investment-grade rating: (1) NSG has low-cost paper assets and a high earnings leverage to newsprint and magazine papers, providing the Company with strong earnings potential when global advertising markets strengthen; (2) A two-year cost reduction program, completed in 2004, reduces annual operating costs by NOK2.0 billion; (3) Capex remains well below depreciation benefiting cash flow; (4) While NSG has a leveraged balance sheet, the Company has developed a track record of generating more than sufficient cash flow from operations to fund capex and dividends; and (5) NSG has financial flexibility in the form of its 29% interest in NorskeCanada, valued at approximately NOK1.1 billion in June 2005.

Note:
p - This rating is based on public information.