DBRS Confirms Catalyst Paper Issuer Rating at CCC (high), Changes Trend to Stable from Negative

DBRS has today confirmed Catalyst Paper Corporation’s (Catalyst or the Company) Issuer Rating of CCC (high) but has changed the trend to Stable from Negative. The trend change recognizes that the Company has been able to stabilize its operating performance, reporting stronger than expected operating results in the last half of 2010. With specialty paper, its largest business, expected to maintain a modest improving trend with the support of a slowly recovering U.S. economy and a profitable pulp business, DBRS believes Catalyst will be able to stabilize its operating performance despite ongoing headwinds from a strong Canadian dollar and a weak newsprint market. Concurrently, DBRS has downgraded the recovery rating of the Senior Secured Debt to RR2 from RR1 and the recovery rating of the Senior Debt to RR6 from RR5, and accordingly, DBRS has downgraded the rating of the Senior Secured Debt to B from B (high) and the Senior Debt to CCC (low) from CCC, which corresponds to the RR2 and RR6 recovery ratings, respectively. The trends are Stable.

Although full year operating results in 2010 were poor, the distinct difference in the performance of the two halves during the year was encouraging. The weak market conditions of 2009, characterized by falling product prices and declining demand, carried through to early 2010. As the year progressed, the Company’s operating performance started to improve amid mixed market conditions among its businesses. Renewed demand for pulp from Asia reversed the early price decline and pushed prices back at recent high levels and supported a return to historical profit levels in the pulp segment. The gradual recovery in the North American economy has slowly boosted the demand for specialty paper. Performance at the specialty printing paper segment improved through the year but was barely profitable. Producer discipline in managing supply was able to support firmer newsprint prices even though demand remained on a downward trend. Despite being a laggard, newsprint did moderate its loss in the last half of the year. The Company was able to stabilize its operating performance in the last half of 2010 despite rising input costs and a strengthening Canadian dollar.

The outlook for the Company’s major businesses remains mixed. The pace of recovery in the U.S. economy is expected to remain modest. Nevertheless, increasing consumer consumption should support a modest, steady increase in print advertising and firmer prices for specialty paper and this positive development is expected to gather pace as the year progresses which bodes well for specialty paper. After an initial weakness in early 2010, soft wood pulp prices have recovered through the year and into 2011, supported by Asian demand. Performance at pulp is expected to continue to improve modestly. However, newsprint demand remains in decline. Nevertheless, the pace of the structural decline appears to have moderated. This, together with ongoing producer discipline in managing supply, is expected to halt further erosion in prices. Consequently, DBRS believes that Catalyst has passed the low point of its operating performance and should be able to show modest improvement or, at least, stabilize its performance in the near future supporting the Stable trend in the current rating.

The refinancing actions taken by the Company to term out all its near-term maturing debt in 2009/2010 have bought time for the Company to turn itself around. The Company has minimal maturity till March 2014 and has adequate liquidity (about $162 million (adjusting for the US$27 million redemption in February 2011) at the end of 2010) to fund its operating needs in the next few years. However, the Company remains aggressively leveraged and is highly vulnerable to any unexpected sharp deterioration in its businesses.

The Company still faces significant headwinds in its recovery. The strong Canadian dollar and rising input costs continue to weigh on its operating performance. In addition, the weak recovery in the U.S. economy could suffer a setback and derail the fragile recovery in the specialty paper market; however, DBRS believes that a double-dip recession in the United States is not likely. DBRS expects the Company’s rating to stay at current levels until the Company can demonstrate that it can stay profitable and generate free cash flow on a consistent basis.

In our last rating action in March 2010, DBRS assigned a recovery rating of RR1 to Catalyst’s Senior Secured Debt and RR5 to its Senior Debt. DBRS has lowered the Recovery Rating of Senior Secured Debt to RR2 from RR1, reflecting our estimated recovery for this instrument of between 80% and 90%. The reduction of the estimate recovery was due to: (1) lower estimated enterprise value as EBITDA was lower in 2010; and (2) much higher senior secured debt levels, which impact the recovery rate, following the $280 million in senior secured notes issuance in March 2010 in exchange for the then senior unsecured notes outstanding. A recovery rating of RR2 corresponds to a rating of B. Accordingly, DBRS has downgraded the Senior Secured Debt to B from B (high).

DBRS has also lowered the recovery rating of the Senior Debt to RR6 from RR5, reflecting our estimated recovery of between 0% and 10% for this instrument. A recovery rating of RR6 corresponds to a rating of CCC (low). Accordingly, DBRS has have downgraded the Senior Debt to CCC (low) from CCC.

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

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