DBRS Confirms Weyerhaeuser Company at BBB with Stable Trend

DBRS has today confirmed the Issuer Rating of Weyerhaeuser Company (WY or the Company) at BBB with a Stable Trend. The rating action reflects that WY’s operating results and associated credit metrics have recovered materially, yet still remain toward the low end of the current rating. This recovery was mainly due to improvement in the market conditions of the three of WY’s main businesses (timberland, wood products and real estate), which are either driven by or heavily exposed to the housing market in the United States. The rating action in turn also reflects DBRS’s view on the sustainability of the recovery, which is expected to bring WY’s credit metrics more in line with the current rating. In addition, the current rating continues to be supported by the strong liquidity provided by its sizable timberland holdings, which can be easily monetized.

Since the second half of 2012, the recovery in the U.S. housing market has picked up and the associated demand in domestic logs, wood products, and real estate has materially strengthened. As a result, WY reported increase in EBITDA in 2012, as stronger results in wood products and real estate more than offset weaker results in timberland and cellulose fibre. However, the weaker results in timberland did not reflect the strengthened domestic demand, as 2011 results were affected by a particular sale of non-strategic timberlands. On the other hand, cellulose fibre results weakened materially, due to lower pulp prices driven by a weak world economic environment and the strengthening of the U.S. dollar.

Near term, DBRS expects the momentum in the U.S. housing market to continue, with housing starts reaching close to 1 million units in 2013. Increasing construction activities will be positive for timberland, wood products and real estate businesses. In addition, log exports to Japan are expected to remain solid, due to the continued strengthening of Japanese housing market. Moreover, conditions for cellulose fibre are expected to improve, due to rising demand driven by global growth. Overall, DBRS expects WY to report significant improvement in operating results in 2013, which in turn is expected to bring WY’s credit metrics more in line with the current rating.

Long-term potential for WY remains very positive. The Company is well-situated geographically to supply growing demand in Asia. The recovery of the U.S. housing market will support sustained strong demand for logs, wood products and real estate. Anticipated reduction on log supply as a result of the mountain pine beetle epidemic in the British Columbia interior will tighten supply, significantly boosting prices for sawlog and wood products during the next upcycle. Moreover, WY’s expertise in silviculture helps boost growth and quality of sawlogs and the value of the timberland holding. Furthermore, cellulose fibre benefits from the strategy of focusing on value-added products and efforts to increase cost competitiveness by increasing uptime and efficiency. WY has the potential to significantly increase earnings and cash flows with the next upturn in the forest products industry.

With cash and unused credit facilities totalling $1.6 billion at the end of March 2013, WY has more than sufficient liquidity to pay off maturing debts in 2013 ($253 million) and to meet any other short-term cash requirements. In addition, WY has a large timberland holding, which DBRS estimates to be valued at about three times the Company’s gross debt. These timberland assets can be easily monetized to raise funds, even in depressed markets, adding to WY’s financial flexibility and providing security to debtholders. Based on DBRS’s industry outlook, WY’s ratings are expected to remain at a Stable trend for the next few years.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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