DBRS Downgrades Catalyst Paper Issuer Rating to B (low), Places All Ratings Under Review - Negative

DBRS has today downgraded the Issuer Rating of Catalyst Paper Corporation (Catalyst or the Company) to B (low) from BB and the Senior Debt rating to CCC from BB, and placed the Company’s ratings Under Review with Negative Implications. All ratings previously had Negative trends. The downgrades reflect the Company’s weak financial risk which is likely to weaken further in view of expected continuation of soft industry conditions and follows the Company’s announcement on November 23, 2009 of its offer to exchange its outstanding 8 5/8% Senior Debt due June 15, 2011 (Old Notes) with new 10% Senior Secured Notes due December 15, 2016 (New Notes) and shares of its common stock. The downgrade on the senior debt ratings also reflects DBRS’s view that the Old Notes held by existing bondholders will be subordinate to the New Notes resulting from the exchange offer if completed. However, the level of subordination has yet to be determined as it will be set by the level of participation in the exchange offer; as such the downgraded ratings and the recovery rating have been placed Under Review with Negative Implications, indicating that additional downgrades are possible.

DBRS views aspects of this exchange offer as disadvantageous to the Old Notes holders for the following reasons: the Old Notes holders that choose to accept the exchange offer will receive less than the original principal amount. Those that do not participate, including the holders of the US$250 million Senior Notes due 2014 who are not included in the offer, will effectively be subordinate to the New Notes. Given that the proposed exchange will not fully reimburse bondholders, DBRS expects that, upon completion of the exchange, the debt that is exchanged will be placed in a default status in accordance with DBRS policy. DBRS recognizes the benefits of a successful bond exchange as debt will be reduced and capitalization will be enhanced. Additionally, an exchange of a meaningful amount of Old Notes should materially improve the Company’s financial flexibility, pushing the next large debt maturity to 2014. Despite the benefits of the debt exchange, DBRS remains concerned about the Company’s overall performance. Operating performance to-date in 2009 has stabilized, but remains below our expectations despite rising pulp prices and benefits from cost reduction initiatives. The Company continues to face significant headwinds to strengthen its operating results. Near-term market conditions are likely to stay soft. Industry operating rates for specialty printing and directory papers are expected to stay low in the near term keeping the demand and pricing of these products near current levels; and it is uncertain that strong demand for pulp in China, the major factor for the recent rise in pulp prices, is sustainable. Furthermore, a rising Canadian dollar would increase the Company’s operating costs putting more pressure on margins. Hence, the Company’s credit metrics are expected to remain weak. The Company’s financial profile is not expected to show any meaningful improvement until the North American economy can stage a strong recovery. However, the mixed economic signals on the North American economy recently are not encouraging.

The Company has offered to exchange each US$1,000 in principal of Old Notes with US$700 in principal amount of New Notes and 269 Common Shares. The Company also offers an Early Tender Premium of US$25 in principal of New Notes for holders who tender their Old Notes at or prior to 5 p.m. on December 9, 2009. If all Old Notes holders participate in the exchange, the maximum aggregate principal amount of New Notes issued in the exchange would be US$256,815,000, inclusive of the Early Tender Premium, and the maximum number of common shares issued in the exchange would be 95,287,332 shares. The New Notes will be secured on a first priority basis by a security interest in certain real property, plant and equipment. In addition, holders of the Old Notes who have accepted the exchange are asked to amend the indenture agreement governing the Old Notes by eliminating substantially all the negative covenants, among other things. Based on the recent price of the Company’s common stock of $0.30 per share, the exchange to the Old Notes holders amounts to a 22% discount to the face value of their bondholding.

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

The applicable methodology is Rating the Forest Products Industry, which can be found on our website under Methodologies.

This is a Corporate rating.