DBRS Comments on Ontario Hydro asset sale by AbitibiBowater Inc.

AbitibiBowater Inc. today announced it has accepted a proposal for the sale of its equity interest in ACH Limited Partnership to a major industrial energy producer. ACH Limited Partnership was established to hold hydro-electric generating assets in Ontario, Canada by the Company’s Abitibi-Consolidated Company of Canada subsidiary in April 2007. The Company owns a 75% interest in ACH Limited Partnership. The proposal values the hydro assets, which have a combined capacity of 136.8 MW, at US$540 million. The resulting gross proceeds (excluding expenses) for AbitibiBowater would be C$197.5 million. As part of the transaction, the buyer would also assume C$250 million of ACH Limited term debt. While DBRS considers the divestiture announcement as an encouraging development, the magnitude of the divestiture proceeds is small in comparison to the debt maturities and cash flow problems AbitibiBowater must address in the near term, and is not material enough to warrant a rating action at this time.

DBRS currently rates the AbitibiBowater’s Issuer Rating at CCC. It is Under Review – Negative.

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. The increasing probability of a major recession in the United States and global economies, and the associated negative impact on newsprint consumption, increases the probability that supply management may not be effective in supporting current newsprint 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.

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. Including today’s announcement, AbitibiBowater Inc. has only completed slightly more than $400 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 further 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. More than $2 billion of debt also 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 applicable methodology is Rating the Forest Products Industry, which can be found on our website under Methodologies.

This is a Corporate rating.