DBRS Confirms Catalyst Paper, Assigns New Issuer Rating

DBRS has today assigned Catalyst Paper Corporation (Catalyst or the Company) an Issuer Rating of BB and confirmed its Senior Debt at BB, both with a Negative trend. Pursuant to DBRS’s Leveraged Finance Rating Methodology, a recovery rating of RR4 (30% to 50%) has been assigned to the Company’s Senior Debt, which corresponds to the BB rating.

Catalyst has performed slightly better than expected and corporate earnings are forecasted to remain close to 2008 levels, despite weak market conditions. The retention of a Negative trend reflects the potential that the Company’s credit profile will weaken over the near term, mainly related to a slower-than-expected U.S. economy, a reversal in recent Canadian dollar weakness and the chance that industry supply management efforts may not be sufficient to stabilize paper prices. Despite the improvement in earnings, cash flows and credit metrics in 2008, the Company’s credit ratios are aggressive for the rating. In the event that Catalyst generates weaker earnings and cash flows in the near term, and credit metrics deteriorate from current levels, the rating could come under pressure.

Earnings are expected to be pressured in 2009. Widespread capacity curtailments are expected to stabilize paper prices in the near term, resulting in higher average annual paper prices in 2009 compared to the previous year. A lower Canadian dollar and reduced energy, chemical and transportation costs will positively impact operating costs. Slightly higher newsprint and directory paper earnings (generated by higher average annual prices and a full year contribution from the acquired Snowflake, Arizona newsprint mill) and lower freight and raw material costs in all paper product lines are expected to offset weaker contributions from market pulp.

However, a severe economic recession could temporarily negate the ability of the industry and the Company to manage supply. Rapidly declining demand and pricing would result in sharply lower earnings and cash flows, adding pressure to the rating, mainly related to the impact on cash flow.

Capex is forecasted to be substantially below depreciation in 2009 – a strategy that will positively impact cash generation. The Company is committed to stemming cash outflows by curtailing production when operating costs fall below break-even levels, a strategy that will conserve cash until market conditions rebound. The Company is well positioned to weather an extended period of weak market conditions. There are no significant debt repayments until 2011, which provides the Company with the flexibility to focus on operating cash requirements. Catalyst had cash and available credit facilities of $180 million at December 31, 2008. Hence, short-term liquidity is not a problem.

Notes:
All figures are in Canadian 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.