DBRS Downgrades Noranda Income Fund to STA-5 (low) and Maintains UR-Negative

DBRS has today downgraded Noranda Income Fund’s (the Fund) Stability Rating to STA-5 (low) from STA-3 (low) following the Fund’s announcement that as a result of Noranda Operating Trust’s (the Trust; see separate DBRS press release dated today) agreement with lenders to extend the maturity date of its short-term credit facility from May 3, 2010, to November 3, 2010, no cash distributions can be paid to unitholders during the extension period. The Fund has also indicated that it expects the refinancing of the Trust’s $154 million Senior Secured Notes maturing December 20, 2010, to result in reduced distributable cash being available to unitholders. The rating action reflects the continuing suspension of distributions during a period when it is expected that the Fund will earn normally distributable cash. In addition, it is uncertain if, when and at what level distributions of the Fund might be restored. In light of this, DBRS has maintained the Fund’s Stability Rating Under Review with Negative Implications until greater clarity on the Fund’s distribution policy emerges.

The Stability Rating of the Fund was downgraded on July 20, 2009, to STA-3 (low) and maintained Under Review with Negative Implications, where it was placed on February 18, 2009. This rating action was taken as a result of the suspension of distributions of the Fund due to reduced production and cash flow from its CEZinc processing facility at Salaberry-de-Valleyfield, Québec (the CEZinc facility). Production at CEZinc had been reduced to about 80% of capacity beginning in March 2009 due to an inability to sell or store by-product sulphuric acid. The reduction of operating levels severely reduced distributable cash available to the Fund. Production at CEZinc was restored to normal levels in October 2009, but distributions from the Fund have remained suspended. The Fund’s announcement of a bar on distributions during the extension period of the Trust’s short-term credit facilities and the Fund’s statement that refinancing of the Trust’s Senior Secured Notes will likely lead to reduced distributable cash available for unitholders in the long term have led to today’s downgrade.

The Fund has indicated that the CEZinc facility operated at normal production levels in the first quarter of 2010. CEZinc’s business model is underpinned by a long-term zinc concentrate processing contract with Xstrata Canada Corporation (Xstrata Canada) that obligates Xstrata Canada to supply CEZinc with zinc concentrates until 2017 and to pay for concentrate processing at specified rates and under specified terms. Under normal operating conditions, the CEZinc facility has historically generated a reliable stream of free cash flow to support the payment of distributable cash to the Fund. DBRS expects that with production at CEZinc restored to normal levels in the first quarter of 2010, the Fund will again have generated significant levels of normally distributable cash and will continue to do so for the rest of 2010. However, it will be restricted in making distribution payments to unitholders.

The Fund has not provided any indication if, when and at what rate distributions would be paid if the Trust were successful in refinancing its short- and long-term financing vehicles. Furthermore, the Fund has indicated that any refinancing of its Senior Secured Notes in 2010 will likely include mandatory repayments of principal prior to the 2017 expiry of the concentrate processing agreement, thereby reducing the cash available for distributions over the long term. In addition, changes in Canadian tax rules with respect to income trusts may also impair the Fund’s future ability to make distributions. Given these uncertainties over the amount and timing of any future distribution payments by the Fund, its rating remains Under Review with Negative Implications.

Given that the Trust’s refinancing efforts are not likely to be completed until well into the second half of 2010, the Under Review-Negative status of the Fund’s rating is likely to be maintained longer than the normally expected period.

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

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

This is a Corporate rating.