DBRS Comments on AbitibiBowater Inc. Debt Exchange Offer

DBRS notes that AbitibiBowater Inc. (ABH or the Company) announced today the commencement of private offers to exchange certain outstanding series of unsecured notes issued by its Bowater Inc. subsidiary (maturing in the 2009-2021 time period and totalling $1.8 billion) for new 10% second lien notes (due January 31, 2012) and 10.5% third lien notes (due March 31, 2012) to be issued by Bowater Finance II LLC (Bowater Finance). Concurrent with this exchange offer, Bowater Finance is offering $211.2 million of new 15.5% first lien notes due November 15, 2011, to investors that subscribe to the exchange offer outlined above. Separately, Bowater Finance has entered into a note purchase agreement with a private institutional investor, in which the investor has agreed to purchase, on a private placement basis, $80 million of first lien notes. Net cash proceeds from the first lien notes offering will be used to repay amounts outstanding under Bowater Inc.’s bank credit facilities.

DBRS placed the ratings of ABH and its subsidiary companies Under Review with Negative Implications on October 30, 2008, due to the refinancing risk facing the Company over the near term – a direct result of the ongoing global credit crisis. DBRS was 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 successful completion of the exchange offer of second and third lien notes and the new issue of first lien notes by Bowater Finance would eliminate the near-term refinancing risk of one of ABH’s subsidiaries. However, Abitibi-Consolidated Company of Canada still has a $347 million term loan due the end of March 2009, and a successful refinancing or repayment of this loan would be required to remove the Under Review with Negative Implications designation.

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 current product prices. Failure to keep supply close to demand would trigger another downward trend in prices that would negatively affect 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 had a negative impact on pulp prices, a condition that is expected to be maintained through H1 2009, adding further pressure on corporate earnings. As a result, the near-term profitability outlook for ABH is negative, as the benefits of a weaker Canadian dollar and stable, albeit low, lumber demand and prices (lumber demand and prices are close to trough levels for this cycle) are outweighed by the negative influence of weaker pulp and newsprint markets. 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 these debt maturities, or raise sufficient cash from divestitures to pay down near-term debt maturities, would force the Company to restructure.

Notes:
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.