DBRS Downgrades Domtar’s Secured Debt Rating to BBB (low) on Refinement of Methodology

DBRS has today downgraded Domtar Corporation’s (Domtar or the Company) Senior Secured Credit Facility (Secured) rating to BBB (low) from BBB. The Company’s Issuer and Senior Unsecured Notes ratings are unchanged at BB and BB (low), respectively, and all trends remain Stable. Today’s rating action reflects a refinement of DBRS’s leveraged finance rating methodology to limit the notching-up of ratings for the secured debt of high-yield issuers that are just below the investment grade level and have a strong recovery rating. Under the revised policy, the result of any notching-up of the instrument rating for a high-yield issuer will be limited to an instrument rating of BBB (low), regardless of the level of the recovery rating that may have been assigned to the instrument (see the concurrent DBRS press release on the methodology changes for more details).

In assigning ratings to leveraged finance (i.e., high-yield) issues, DBRS first assigns an issuer rating that reflects the default risk of the issuer itself, then assigns separate recovery ratings and instrument ratings to the issuer’s specific debt instruments. The instrument rating is a blend of both the issuer rating and the recovery rating and, therefore, may be notched up from the issuer rating in cases where the recovery rating reflects above-average post-default recovery prospects. Likewise, the instrument rating may be notched down in cases where the recovery rating reflects diminished recovery prospects.

Domtar was originally assigned (and maintains) an Issuer Rating of BB. However, based on DBRS’s recovery analysis, the Secured debt was assigned a recovery rating of RR1, which assumes an expected recovery of 90% to 100% in a post-default scenario. The RR1 equated to a Secured rating of BBB, or three notches above the issuer rating (see rating report dated May 12, 2009).

In reviewing our leveraged finance methodology, DBRS noted that as a company moves through the BB rating range and approaches investment grade, the likelihood of default is significantly lower. Therefore, DBRS felt it appropriate to restrict the beneficial impact of the recovery rating on the final instrument rating outcome. The effect of this policy refinement is to lessen the weighting of recovery on the instrument ratings of credits that are on the cusp between investment grade and non-investment grade.

The revised leveraged finance methodology has therefore capped Domtar’s Secured rating at BBB (low), which is effectively a two-notch upgrade above the issuer rating. DBRS notes that our recovery analysis has not changed and the RR1 still applies to the Secured debt. DBRS notes that because this change reflects a change in methodology, it is considered technical in nature and in no way reflects any change of DBRS opinion on the credit quality of Domtar.

Notes:
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.