DBRS Confirms Norbord Inc. at BB/BB (low) with Stable Trend

DBRS has today confirmed the Issuer Rating of Norbord Inc. (Norbord or the Company) at BB (low) and the trend remains Stable. The Company has performed as expected, and DBRS expects Norbord’s financial profile to strengthen to levels compatible with the current rating once the U.S. housing industry recovers from current weak levels.

DBRS has also confirmed the recovery rating and instrument rating of Norbord’s Secured Debentures at RR3 and BB respectively. Furthermore, DBRS has assigned a recovery rating of RR3 to the new Senior Secured Notes and a recovery rating of RR6 to the new Senior Unsecured Notes, which corresponds to an instrument rating of BB and B, respectively.

DBRS notes that, despite a still weak financial profile, the current rating continues to be supported by Norbord’s solid business profile as a leading and low-cost producer of oriented strand board (OSB) in North America and the implied support from Brookfield Asset Management Inc. (BAM, rated A (low) by DBRS), its majority owner.

The Company’s performance is significantly influenced by the conditions of the U.S. housing industry, which has been in a severe recession. Housing starts have experienced a deep decline since early 2007. Although construction activities bottomed around mid-2009, the recovery has been tepid and well-below historic average. The Company’s operating results were weak during this period and the resultant financial profile is aggressive for the current rating.

Nevertheless, the U.S. housing industry appears to be gathering momentum based on recent industry indicators, such as housing starts, builder sentiment, home sales, home prices, etc. Additionally, as U.S. housing demand has improved, North American OSB prices have been strengthening, a major contributing factor to better performance in Q1 2012.

Near term, favourable developments in the key North American market bode well for stronger operating results in 2012. However, ongoing fiscal crisis in Europe is a concern. Further deterioration in Europe could halt the positive momentum in the North American housing market. Nevertheless, DBRS believes that conditions in the North American market would support OSB prices to retain the recent gains. Ongoing benefits from the margin improvement program (MIP) would further add to earnings. DBRS expects higher operating earnings in 2012, similar to 2010 levels, supported solely by the improvement in North America. Norbord’s European operation will be under pressure due to the ongoing fiscal crisis and is not expected to report year-over-year improvement. DBRS does not expect a meaningful increase in housing starts (near a one million unit level) in the U.S. until the latter part of 2013; however, higher U.S. housing starts and the resultant stronger demand for OSB will be unlikely until pressure from the European fiscal crisis recedes. Norbord’s financial profile will remain aggressive for the current rating until housing activities return to a much firmer footing. Despite weak operating results, the Company still has ample liquidity to support its operations and weather the current downturn. The Company had about $327 million in cash and unused credit facility at the end of March 2012. The recently announced refinancing of the maturing secured debt extending the maturity to June 15, 2015, has further added to the Company’s financial flexibility. Furthermore, potential support from BAM, Norbord’s majority owner, is another positive. BAM committed to provide a $120 million standby loan to repay maturing debt in 2012. (With the refinancing now complete, the standby loan is no longer necessary.) BAM’s action has demonstrated its willingness to assist when necessary.

Going forward, Norbord is well positioned to benefit from a full recovery of the U.S. housing market. Although the current recovery is much slower than expected, structural factors, such as increasing household formation, pent-up demand, etc., will support a full recovery in the housing sector. In addition, benefits from MIP would strengthen the Company’s leading position in the OSB market and cost competitiveness.

Pursuant to the rating methodology for leveraged finance, DBRS has created a default scenario for Norbord in order to analyze when and under what circumstances a default could hypothetically occur and the potential recovery of the Company’s debt in the event of such a default. The scenario assumes that the U.S. economy fails to recover and falls into a recession in the last half of 2012. This would lead to continued deterioration in the demand for building products. Under this scenario, the Company would exhaust its liquidity in late 2013. DBRS has determined Norbord’s estimated value at default using an EBITDA multiple valuation approach, consistent with a view that default would likely result in the restructuring and/or recapitalization of the assets with value as a going concern versus the sale of its individual assets. EBITDA multiples utilized are applied to cyclically normalized EBITDA at default as opposed to the actual low EBITDA values expected at the time of default, reflecting the forward-looking nature of the valuation. The valuation considers the issuer and the specific debt instruments, allocating value proceeds accordingly. Based on the default scenario above, the secured debts would have recovery estimated between 50% and 70%, which aligns with a recovery rating of RR3. Therefore, the instrument rating of the secured debts is BB, one notch higher than the Issuer Rating. In addition, the unsecured debts would have recovery estimated between 0% and 10%, which aligns with a recovery rating of RR6. Therefore, the instrument rating of the unsecured debt is B, two notches below the Issuer Rating.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating the Forest Products Industry (June 2011), which can be found on our website under Methodologies.

Issuer ratings apply to all general senior unsecured obligations of the issuer in question. For the definition of issuer rating, please refer to Rating Definitions under Rating Policy on www.dbrs.com.