DBRS Downgrades AbitibiBowater Inc. & Subsidiaries

DBRS has today downgraded the ratings of AbitibiBowater Inc. (ABH or the Company) and its subsidiary companies, including ABH’s Issuer Rating to CCC from B (low). The ratings remain Under Review with Negative Implications, where they were placed on October 30, 2008, due to the refinancing risk facing the Company over the near term; the direct result of the ongoing global credit crisis. DBRS is concerned that substantial debt maturities and limited cash availability may adversely affect ABH’s ability to successfully refinance debt maturities in the next 12 months. The downgrade reflects increased business risk and a weakened credit profile which is no longer compatible with the previous ratings.

The downgrades reflect the negative impact of (1) a strong Canadian dollar, (2) escalating rates of decline for North American newsprint consumption, and (3) operating cost pressures on the Company’s financial performance, as well as the absence of significant improvement in credit metrics that were inconsistent with previous ratings. The increasing probability of a major downtrend in the U.S. and global economies, the associated negative impact on newsprint and market pulp consumption and the chance that supply management may not produce sufficiently high newsprint and pulp prices to materially change ABH’s credit profile, substantially increases the Company’s business risk. The Company faces the additional risks of potential labour disruptions in 2009, and a challenging credit environment that may limit planned asset sales. A lack of progress in strengthening the Company’s credit metrics in the near term could lead to further negative rating actions.

The outlook for newsprint, market pulp and lumber markets, the key drivers of ABH’s earnings and cash flows, remains bleak. The rate of decline in North American newsprint consumption has increased in recent months and will require aggressive production curtailments to support a long-term upward trend in product prices. Failure to keep supply close to demand would trigger another downward trend in prices that would negatively impact earnings and cash flows. In addition, reduced global economic activity has lowered demand for all paper and packaging products and the associated raw material, market pulp. Rapidly rising pulp inventories have negatively impacted pulp prices, a condition that is expected to be maintained into 2009, adding further pressure on corporate earnings. Despite adverse market conditions ABH has publicly committed to manage supply going forward and DBRS expects increased newsprint segment earnings to offset a lower contribution from market pulp in 2009. As a result, the near-term profitability outlook for ABH is neutral as the benefits of paper price increases, cost savings and stable, albeit low, lumber demand and prices (lumber demand and prices are close to trough levels for this cycle) outweigh the negative influence of weaker pulp markets and a strong Canadian dollar. ABH’s credit profile is expected to worsen from 2008 levels. At September 30, 2008, ABH and subsidiary companies had cash of $295 million and about $76 million available under the Bowater Inc. credit agreement. However, at current levels of cash consumption, the Company will likely require additional divestiture proceeds to survive an extended period of depressed market conditions. At September 30, 2008, ABH had only completed $210 million of the planned $750 million of its 2008-2009 asset sale program, and the current challenging credit environment may limit the ability of potential purchasers to raise sufficient funds to finance acquisitions. ABH and its subsidiaries also face the spectre of substantial debt maturities in the next three years. At September 30, 2008, debt due within one year amounted to $1 billion, of which $347 million is due March 31, 2009. A further $2.4 billion of debt comes due in 2010-2011. Failure to refinance debt maturities, or raise sufficient cash from divestitures to pay down near-term debt maturities, would force the Company to restructure.

Note:
All figures are in U.S. dollars unless otherwise noted.
The Abitibi-Consolidated Company of Canada Notes are guaranteed by Abitibi-Consolidated Inc.

The applicable methodology is Rating the Forest Products Industry which can be found on our website under Methodologies.

This is a Corporate rating.