DBRS Downgrades Noranda Income Fund’s Stability Rating to STA-3 (high), Changes Fund and Operating Trust to Under Review – Negative

DBRS has today downgraded the Stability Rating of Noranda Income Fund (the Fund) to STA-3 (high) from STA-2 (middle). In addition, both the Stability Rating and the BBB (high) rating of the Senior Secured Notes of the Fund’s wholly-owned Noranda Operating Trust (the Trust) have been changed to Under Review with Negative Implications from Under Review with Developing Implications, where they were placed on February 10, 2009, following an announcement regarding potential reduction and or shutdown of production due to limited storage capacity for sulphuric acid. (For further details see the DBRS press release dated February 10, 2009).

The downgrade follows the Fund’s announcement that the monthly cash distribution will be significantly reduced in February 2009 to $0.04 per Priority Unit, down from the $0.085 per units that has been paid since February 2003. As a result of the reduction in the distribution below the Base Distribution amount of $0.083, the subordination feature became effective and the Ordinary Units owned by Xstrata Canada, will not receive any distribution. The downgrade reflects an interruption of a consistent distribution amount which is no longer consistent with DBRS methodology. The change for both the stability rating and the debt rating to Under Review with Negative Implications is due to ongoing operational issues associated with reduced shipments of sulphuric acid and zinc, which could impair future distributions and the ability of the Trust and the Fund to service its debt requirements.

Due to the economic downturn, the Fund has experienced reduced demand for their zinc products as well as zinc premiums, copper revenue and sulphuric acid netbacks. The Fund has seen a 40% drop in orders from the steel companies in the last two months which has led to an inventory build up. Even though the apparent capacity to pay the full distribution of $0.085 exists (through the nominal reserve, credit ability, continuing operations), the Fund has chosen to be prudent during these challenging times and protect the balance sheet and maintain liquidity. The outlook for 2009 is uncertain with the duration and depth of the global crisis difficult to predict. The Fund is unable to provide any certainty with respect to future distributions which further supports the downgrade of the Stability Rating.

Despite reduced demand for the Fund’s products and service, the Fund posted solid 2008 operating results today due to strong pricing and demand for their zinc products in the first three quarters of the year. Demand for sulphuric acid slowed dramatically only in January of 2009 (thereby limiting any negative impact on 2008 results). Credit metrics have improved slightly in 2008 compared to 2007 and are still commensurate with the BBB (high) rating.
With its strong financial performance in 2008 the Trust is on side with its covenants as of the end of 2008. In addition, as at December 31, 2008 the Trust had adequate liquidity (cash on hand of $3.5 million and $36 million in available credit lines).

However, if the downturn continues to result in low demand for zinc, this could result in a build up of zinc inventory that could deteriorate the working capital line availability and stress the Trust’s liquidity. Additionally, the build up of sulphuric acid, if unresolved, could lead to a lower production rate at the smelter and an associated decline in earnings, increasing the risk of the Trust breaching its covenants.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate rating.