DBRS Assigns Recovery Ratings to AbitibiBowater Inc.

DBRS has today assigned default recovery ratings of RR1 to the secured debt of Abitibi Consolidated Company of Canada and RR4 to the unsecured debt of Abitibi Consolidated Inc. (Abitibi) and subsidiary companies. DBRS has also assigned default recovery ratings of RR1 to the secured debt of Bowater Inc. (Bowater) and subsidiaries and RR5 to the unsecured debt of Bowater Inc. and subsidiaries.

Pursuant to DBRS’s Leveraged Finance Rating Methodology, default ratings are the result of hypothetically stressing the Company’s operations to the point of default, assessing the market value of the company as a going concern at the point of default, and then calculating the likelihood of recovering the company’s secured and unsecured debt. A RR1 recovery rating anticipates a recovery of 90% to 100% of the principal, a RR4 recovery rating 30% to 50%, and a RR5 recovery rating 10% to 30%.

The ratings of AbitibiBowater Inc. (ABH or the Company) and its subsidiary companies 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 and deteriorating industry fundamentals. 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 successful completion of a recently announced 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 successful completion of the Bowater exchange offer would also necessitate a change in Bowater’s recovery rating.

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 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 through H12009, 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.

Notes:
All figures are in U.S. dollars unless otherwise noted.
The ratings are based on public information.

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

This is a Corporate rating.