DBRS Comments on Noranda Credit Facility Amendments

DBRS notes today that Noranda Income Fund (the Fund) has announced its third quarter 2009 financial results and that the Fund has been informed by the agent of the lenders under its subsidiary’s (Noranda Operating Trust) revolving credit facility that support to amend the facility has been received from the required lenders, which is expected to significantly reduce the likelihood of a covenant breach under the credit facility prior to its expiry on May 1, 2010. DBRS views the credit facility amendments as positive developments, but with the renewal of the short-term borrowing facility with lenders still unresolved, we are maintaining the Trust’s BBB Senior Secured Notes rating Under Review with Negative Implications. With a successful renewal of the short-term credit facilities on terms DBRS considers reasonable, DBRS expects to remove the Trust’s rating from its Under Review with Negative Implications status. In addition, the Fund continues to suspend all distributions and we continue to maintain the Fund’s STA-3 (low) stability rating Under Review with Negative Implications, where it was placed on February 18, 2009, until distributions of the Fund are restored.

DBRS has acknowledged the positive impact that restoring the CEZinc processing facility at Salaberry-de-Valleyfield, Québec (CEZinc) to full production capacity was expected to have on the Fund’s earnings, cash flow and likely return to distribution payments (for details see the DBRS press release dated September 28, 2009). In addition, we highlighted the need for the Fund’s subsidiary, Noranda Operating Trust (the Trust), to resolve with its lenders the impact of potential covenant breaches in its operating facility, as a result of the Trust’s Senior Secured Notes becoming a current liability in the fourth quarter of 2009 and the decline in EBITDA experienced by the Trust (due to the period of 80% concentrate processing experienced to the end of September).

The Fund has now indicated that lenders have agreed that the maturity of the Trust’s approximately $153 million in long-term notes that mature on December 20, 2010 will now be excluded from the definition of current liabilities under the revolving facility agreement for the purposes of calculating the current ratio covenant. Accordingly, the Fund does not expect that the current ratio covenant will be breached in the future. In addition, the Fund had highlighted that a second covenant of the revolving facility agreement, namely that the ratio of total debt at the end of a period to earnings before interest, taxes, depreciation and amortization (EBITDA) for the trailing four quarters ending with the end of the period would be required to be less than 4.25 to 1 (the Leverage Ratio), would potentially be exceeded due to reduced EBITDA during the period of processing zinc concentrate at only 80% of capacity. As a result, a second amendment to the credit facility has been agreed to such that the Leverage Ratio maximum has been increased from 4.25 to 1 to 5.25 to 1 for the periods ending December 31, 2009 and March 31, 2010. In part, the amendments come at a cost of higher interest rates with the interest rate spread on the facility increasing from 2% to 4.5% for the remainder of its term. The Fund has indicated that with the CEZinc facility operating at full capacity there is a significantly reduced risk that the amended Leverage Ratio would be breached. The Fund has also indicated that the Trust is in the process of negotiating short-term borrowing facilities to replace or extend the existing short-term borrowing facilities, which mature on May 1, 2010.

The Fund reported relatively poor operating results for the third quarter of 2009, a period during which the CEZinc facility operated at only 80% of capacity. The CEZinc facility began operating at full capacity in early October 2009. During the third quarter, the Fund generated operating cash flow before working capital changes of $9.4 million and of negative $9.3 million after working capital changes due to a large increase in accounts receivables as a result of high zinc sales and prices in September, partially offset by significantly higher payables to Xstrata Canada than at the end of the second quarter. The negative cash from operations generated negative distributable cash and no distributions were made during the quarter. DBRS expects that the Fund will generate positive distributable cash in the fourth quarter with the CEZinc facility operating at capacity, but to date, no distributions have been declared by the Fund and it remains uncertain as to when distributions may be restored.

If CEZinc is able to maintain near-full capacity operations and the Fund is able to restore distributions, DBRS expects to remove the Fund’s STA-3 (low) stability rating from Under Review with Negative Implications. Similarly, if the Trust can successfully achieve renewal of its short-term borrowing facility with its lenders on reasonable terms, DBRS expects to remove its Senior Secured Notes rating from Under Review with Negative Implications. Failure to achieve either resolution could lead to further negative rating actions.

Notes:
The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate rating.

For further details, see DBRS press releases dated February 9, 18, 23, July 20 and September 28, 2009 and rating reports of March 31, 2009.