DBRS Assigns Secured Debt and Issuer Ratings to Norbord

DBRS has today assigned an Issuer Rating to Norbord Inc. (Norbord or the Company) of BB with a Negative trend, meaning that our opinion on the default rating of Norbord has declined from BB (high) to BB. DBRS has also assigned a rating of BBB (low) to both the Secured Debentures of Norbord Inc. and the Senior Secured Notes of Norbord (Delaware) GP I. The rating differential between the Issuer Rating and the instrument rating is a reflection of the DBRS Rating Methodology for Leveraged Finance. Under this methodology (as described below), DBRS has assigned an RR2 recovery rating to Norbord’s secured debt, which indicates an expected 70% to 90% recovery under a distress scenario and results in the secured debt being rated two notches higher than the Issuer Rating. The lower default rating reflects the negative impact of depressed oriented strandboard (OSB) markets on Norbord’s financial structure and a longer-than-expected time frame for the Company to significantly repair its financial profile. In addition, Norbord’s financial profile is no longer appropriate for a higher rating, following weak Q1 2009 financial performance and continued high leverage. The Negative trend reflects the significant risk that industry demand-to-supply ratios, energy, raw material and transportation costs may not conform to expectations and that earnings and cash flows could worsen. In addition, Norbord’s high leverage gives the Company less margin for error. A lack of progress to stabilize operating performance could lead to further negative rating actions.

The rapid deterioration in U.S. residential housing market conditions is largely responsible for the sharp drop in demand for OSB and pricing, the key drivers of Norbord’s earnings and cash flows. The North American building products sector is close to the bottom of the cycle, but a meaningful improvement is unlikely to occur until 2010. Although a seasonal upturn in the North American construction sector is expected to result in a temporary rise in OSB prices in mid-2009, average annual prices are forecast to remain at low levels. In the interim, ongoing weakness in the U.S. housing market and North American OSB curtailments are expected to keep earnings and cash flows at low levels. However, evidence of a recovery in 2010 is expected to have a positive influence on prices in H2 2009.

The current rating is supported by the implied support of Brookfield Asset Management Inc. as evidenced by the successful execution of the standby purchase agreement in connection with the recent rights offering. Additionally, the Company is the lowest-cost producer of OSB in North America. Despite the weak outlook for OSB industry conditions in North America, the Company’s favourable cost structure provides important earnings and cash flow downside protection and also underpins the current Issuer Rating. Higher-cost industry capacity has been and is expected to continue to be curtailed, keeping supply close to demand, supporting higher prices during seasonal increases in demand. Reduced energy, raw material and transportation costs will positively affect operating costs, enabling the Company to keep 2009 earnings close to 2008 levels. Capex is forecast to be substantially below depreciation in 2009, a strategy that will have a positive effect on cash generation. The Company is well positioned to weather an extended period of weak market conditions. There are no debt repayments before 2011, which provides the Company with the flexibility to focus on operating cash requirements. Norbord had cash and available credit facilities of approximately $185 million at March 31, 2009. Hence, short-term liquidity should not be a problem. 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. Furthermore, Norbord, as a low-cost producer, should generate favourable profitability once the building products market turns around.

As prescribed under the DBRS Rating Methodology for Leveraged Finance, DBRS has simulated a default scenario for Norbord in order to analyze the potential recovery of the Company’s debt in the event of default. In order to analyze potential recovery for various debt classes in the event of default, DBRS must first simulate a default scenario, regardless of how hypothetical it might appear and despite the relatively unlikely default probability that the Company’s rating implies. The default scenario stresses the operating results to the point at which default would be considered likely to occur in order to enable DBRS to project potential levels of recovery that would be available to various debt classes in such an event. In the case of commodity-based companies, that scenario includes severe economic conditions, usually a deep, protracted recession or depression in which product demand and prices plummet. EBITDA quickly declines and usually turns negative and companies with large debt maturities and/or insufficient short-term liquidity can quickly reach the point of default.

In the case of Norbord, earnings and cash flows would rapidly deteriorate from 2008 levels and the Company would exhaust its credit facilities in 2010. For the purposes of this analysis, DBRS assumes that the ongoing deterioration of corporate finances and general pessimism about future economic conditions would require the Company to restructure. The Company’s capability of generating large returns at cycle peaks and the potential for substantial earnings gains in the next building cycle suggest creditors would gain the greatest recovery by reorganizing the Company’s building products assets as a going concern. The most likely prospect is that a private equity investor would purchase Norbord’s building products assets with a view to taking the Company public during the next North American economic recovery.

DBRS considers that a ten-year building products EBITDA trend (omitting outlier years and adjusting for lower future housing starts on a seasonally adjusted annual rate (SAAR)) represents a realistic assessment of the Company’s prospects through the next business cycle. A conservative EBITDA multiple of 5.0 times has been used to value Norbord’s operations at the time of restructuring. The relatively low multiple reflects expectations of pessimistic outlooks by forest products industry participants and the financial community at the time of reorganization. At the distressed valuation level, DBRS believes the secured debtholders would recover about 78% of the principal and has therefore assigned a recovery rating of RR2.

DBRS has discontinued the unsecured ratings associated with Norbord Inc. and Norbord (Delaware) GP I.

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

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

This is a Corporate rating.