DBRS Assigns Issuer Rating and Confirms Canfor Corporation at BB (high), Trend Now Negative

DBRS has today assigned an Issuer Rating of BB (high) to Canfor Corporation (Canfor or the Company) and changed the trend on its Senior Notes to Negative from Stable. Pursuant to the DBRS Rating Methodology for Leveraged Finance, a recovery rating of RR4 (30% to 50% recovery) has been assigned to the Company’s Senior Notes, which corresponds to the BB (high) Issuer Rating. The change to a Negative trend reflects the fact that the Company’s credit profile is weak for the current rating. Additionally, near-term market conditions are expected to be challenging. In the event that Canfor cannot stabilize its financial performance and that credit metrics continue to deteriorate from current levels, the current rating would be at risk.

Canfor has performed slightly better than expected in 2008 and corporate earnings are forecast to remain close to, but slightly lower than, 2008 levels despite weak market conditions. However, the Company is expected to report weaker earnings and cash flows in H1 2009 before recovering in H2 2009. A significantly weaker Canadian dollar and lower freight, energy and chemical costs are expected to offset much of the negative earnings impact of lower pulp prices and shipments in H1 2009 before prices recover in H2 2009. The Company also faces the risk that 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 product prices would put more pressure on the Company’s operating performance.

The Company’s balance sheet remains moderately leveraged (with debt as a percentage of capital at less than 30%) and its liquidity position is favourable (cash on hand plus availability in credit facilities totaled $726 million at the end of 2008), which should be more than enough to pay debt maturities of $168 million in H1 2009 as well as fund its operating needs through the current downturn. Additional liquidity from a divestiture, tax refund, insurance payment and additional credit facilities in 2009 will amount to approximately $200 million. Capex is forecast to be substantially below depreciation in 2009, a strategy that will have a positive effect on cash generation. The Company is committed to stemming cash outflows by curtailing production when operating costs fall below breakeven levels, a strategy that will conserve cash until market conditions rebound. Despite these measures, DBRS still expects the Company to incur a deficit in free cash flow. However, the Company has more than enough liquidity to meet its operating needs. There are no debt repayments in H2 2009 and no significant debt repayments in 2010, which adds to the Company’s financial flexibility. The Company is well positioned to weather an extended period of weak market conditions. Furthermore, Canfor is a low-cost producer and should generate favourable profitability once the building-products market turns around.

DBRS has simulated a default scenario for Canfor in order to analyze the potential recovery for the Company’s Senior Notes in the event of default. The scenario assumes a prolonged period of severe economic conditions, regardless of how hypothetical or unlikely the conditions may be, in which product demand and prices plummet. EBITDA quickly declines and turns negative over the forecast period. DBRS assumes that the Company would be reorganized as a going concern in the event of default and derived a recovery rating of RR4 for the Senior Notes. RR4 corresponds to recovery prospects of between 30% and 50% for senior noteholders.

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

The applicable methodologies are Rating the Forest Products Industry and DBRS Rating Methodology for Leveraged Finance, which can be found on our website under Methodologies.

This is a Corporate rating.