DBRS Changes the Trend of Norske Skogindustrier from Stable to Negative

Dominion Bond Rating Service (DBRS) has today changed the trend of the Senior Debt of Norske Skogindustrier ASA (NSG or the Company) to Negative.

The trend change on the Senior Debt of Norske Skogindustrier ASA (NSG or the Company) to Negative reflects the negative impact of ongoing competitive market conditions and low productivity in NSG’s Australasia operations on the Company’s credit metrics. NSG’s credit metrics are considered aggressive for the rating. Ongoing competitive market conditions in most of the Company’s markets and high operating costs have increased NSG’s financial risk, although its business risk profile remains in line with the forest industry average. Low productivity in NSG’s Australasia operations, excess paper capacity in South Korea and weak European paper markets will likely prevent the recovery of earnings to historical high levels in the near term.

In addition, higher energy and energy-related costs and a stronger Norwegian krone are also expected to put pressure on earnings. DBRS has not downgraded the rating for NSG because ongoing restructuring initiatives and industry capacity reductions are expected to produce an improvement in earnings and cash flows in 2006–2007. Earnings are expected to improve from 2005 levels as the full impact of the 100% ownership of PanAsia Paper Company has a positive impact on earnings in 2006. In addition, strong paper demand in China and India is forecast to offset weak demand in South Korea. Industry capacity reductions and improving advertising markets in Europe are expected to result in product price increases that will improve earnings and cash flows. Rebuilding existing capacity and closing high-cost machines should increase margins in Australia. 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 paper supply moves closer to demand.

However, in the event that the credit metrics do not increase to levels considered more appropriate for the current rating, a DBRS downgrade is likely. The Company also intends to grow through acquisitions. Historically, NSG has been able to partially fund acquisitions with asset sales or equity issues, and DBRS expects management to continue to use these strategies. However, a significant major debt-financed acquisition during weak market conditions would also put pressure on the rating.

Note:
This rating is based on public information.