DBRS Comments on AbitibiBowater’s Proposed Recapitalization

DBRS notes that today AbitibiBowater Inc. (ABH or the Company) announced that it is planning the recapitalization of its Abitibi-Consolidated Inc. (Abitibi) subsidiary to reduce debt and improve liquidity. The recapitalization plan includes the conversion of existing debt into a combination of new debt, ABH common shares and warrants; a concurrent offering of additional warrants; the repayment of maturing debt; and cash generated from the pending sale of the Company’s interest in the Manicouagan Power Company (Manicouagan). DBRS views the announcement as positive for ABH, but a rating action is currently not warranted. The ratings of the Company and its subsidiaries remain Under Review with Negative Implications, given the execution risk related to the proposed restructuring as several conditions must be met for approval of the plan and the significant near-term liquidity risk faced by ABH.

The recapitalization plan for its Abitibi-Consolidated Inc. subsidiary includes the conversion of $2.9 billion of eligible unsecured notes into a combination of (1) new notes totaling roughly $1.1 billion (including $321 million in 12.5% first-lien notes due March 2014 and $810 million 11% second-lien notes due June 2014), (2) roughly 86.7 million ABH common shares and (3) roughly 230.7 million warrants (Series A to C). In addition, a concurrent offering of $389 million in first-lien notes and 222.2 million warrants (Series D) for an aggregate purchase price of $350 million. Certain investors and noteholders will have the option for an additional $150 million in warrants and $100 million in first-lien notes, respectively. Furthermore, the Company has proposed the repayment of its $413 million 13.75% secured notes due 2011 and a portion (up to $200 million outstanding) of its existing term loan (and maturity extended to 2012 from March 30, 2009) with cash. As part of the recapitalization, ABH expects to generate gross proceeds of C$615 million from the sale of its 60% interest in its hydroelectric facility located on the Manicougan River in Québec, which follows the previously announced sale of its interest in hydroelectric facilities in Ontario for gross proceeds of C$197.5 million

Upon successful completion of the proposed recapitalization, ABH expects to reduce debt by $2.4 billion, reduce annual interest expense by $162 million and provide $350 million of new capital. However, while the recapitalization is expected to be completed in May 2009, it is conditional on several factors, including (1) final court approval; (2) completion of the Manicouagan sale; (3) completion of the previously announced exchange offers, notes offering and private placement by Bowater Inc., Bowater Canada Finance Corp. and Bowater Finance II LLC (all wholly owned ABH subsidiaries – as announced on February 9, 2009); (4) the closing of the concurrent $350 million warrants offering; and (5) completion of the amendment of the convertible notes of ABH into $190 million of new convertible notes of the Company, which will be convertible for ABH’s common shares (for $1.75 per share). The several approvals that are required lead to material execution risk facing ABH in completing the plan.

DBRS notes that the completion of the recapitalization plan as proposed would be positive for the Company’s credit profile. The elimination of debt maturing in 2009 and 2010 would help the Company survive a prolonged economic slump without the near-term risk of a liquidity crisis. The Company indicated that noteholders with more than $1 billion in outstanding ABH notes (roughly 34%) have so far agreed to vote in favour of the recapitalization, which is also positive. However, there remains uncertainty regarding ABH’s ability to complete the plan and, as a result, manage the current liquidity crisis that it is facing.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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