DBRS Confirms Norske Skogindustrier ASA at BBB (low)

DBRS has today confirmed the rating for Norske Skogindustrier ASA’s (NSG or the Company) Senior Debt at BBB (low). However, the trend remains Negative, reflecting the expectation of increasing business risk associated with its global newsprint business.

The full consolidation of the Company’s Asian business and higher newsprint prices in Europe and South America resulted in improved operating earnings in 2006. Cash proceeds from the sale of shares in Catalyst Paper also enabled NSG to substantially reduce total debt, although restructuring costs and impairment charges negatively impacted net income and shareholders equity, resulting in increased leverage.

The restructuring is proceeding as expected and will reduce costs when completed. Despite the improvements in operating earnings and reduced total debt levels, the outlook for the Company’s global newsprint business has deteriorated in recent months, and is the predominant reason for maintaining a Negative trend. New newsprint capacity in China and newsprint oversupply conditions in North America are expected to result in increased exports from these regions that will negatively impact demand/supply relationships in several regional markets. Lower newsprint prices are expected in South America, parts of Asia and Australia.

Although demand for newsprint in Europe is expected to increase in 2006, increased competition from North American imports is expected to limit further price increases. Increased competition in these regions is forecasted to remain in place beyond 2007/2008, increasing the Company’s business risk in the respective business segments. As a result, a high likelihood exists that increased competition will result in lower product prices and reduced operating earnings and cash flow. Aggravating the situation are higher energy and energy-related operating expenses and a stronger Norwegian krone, which could also pressure earnings.

NSG’s credit metrics are considered aggressive for the rating, and if they deteriorate from current levels, 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 major debt-financed acquisition during weakening market conditions would also put pressure on the rating. Notwithstanding the weaker outlook, NSG has a manageable debt repayment schedule, and unutilized credit facilities provide more than sufficient cash to fund near-term requirements.