DBRS Confirms Ratings of Norbord Inc. at BB, Stable Trend

DBRS has today confirmed the Issuer Rating of Norbord Inc. (Norbord or the Company) at BB with a Stable trend. The confirmation reflects that Norbord has performed mostly in line with expectations (notwithstanding the weak results in Q1 2014 impacted by cold weather in North America) and also reflects the fact that the Company’s credit metrics remain acceptable for the current rating. The Stable trend reflects DBRS’s expectation of solid credit metrics for the full-year 2014 period. The expectation of solid credit metrics and stronger results in the remainder of 2014 reflects DBRS’s unchanged view on the sustainability of the recovery in the U.S. housing industry. Moreover, Norbord’s issuer rating continues to be supported by its solid business profile as one of the leading and low-cost oriented strand board (OSB) producers.

DBRS has also confirmed the recovery ratings of the Senior Secured Notes of Norbord Inc. and Norbord (Delaware) GP I at RR3. As a result of the base Issuer Rating being confirmed at BB with a Stable trend, the RR3 ratings on the Senior Secured Notes of Norbord Inc. and Norbord (Delaware) GP I correspond to a BB rating with a Stable trend.

Market conditions strengthened in 2013, with higher North America OSB prices driven by the improvement in the U.S. housing market. As a result of the strong OSB prices driven by demand, Norbord generated significantly stronger results and credit metrics in the full-year 2013 period. However, Norbord’s Q1 2014 results were exceptionally weak due to lower OSB prices driven by lower demand. DBRS believes the weaker market conditions were mainly attributed to the abnormal harsh winter weather conditions, which dampened residential construction activities. On top of that, restarted industry capacities due to the industry’s expectation of continuing recovery in the U.S. housing market also compounded the temporary decline in demand and negatively impacted prices.

Going forward, DBRS expects stronger North America results in the remainder of the year; which are driven by higher OSB prices as demand improves in line with the expectation of continuing recovery of U.S. housing market. However, as demand continues to strengthen, DBRS expects more industry capacities to be restarted and therefore will likely have some limitation effects on the prices. On the other hand, Europe results are expected to remain solid in the remainder of 2014; which are in line with the expectation of continuing improvement of housing markets in the U.K., Germany and Benelux. As a result, DBRS expects Norbord to generate better results in the remainder of 2014 and maintains solid credit metrics for the full-year 2014 period.

Moreover, DBRS continues to believe that Norbord is well-positioned to benefit from the full recovery of the U.S. housing market, supported by increasing household formation, pent-up demand and an improving U.S. economy. DBRS also maintains its expectation of 2014 U.S. housing starts to be approximately 1.1 to 1.2 million units (923,400 units in 2013).

Norbord’s credit rating continues to be supported by its solid business profile as one of the leading and low-cost OSB producers, driven by continued improvements in operating efficiencies and the implied support of Brookfield Asset Management Inc. (BAM, rated A (low) by DBRS), its majority owner.

In conclusion, DBRS expects the U.S. housing market to continue its recovery and Norbord’s credit metrics to remain solid for the full-year 2014 period. DBRS also expects Norbord to maintain its solid business profile. On the other hand, if the U.S. housing market unexpectedly weakens in a significant manner, and in turn, Norbord’s operating results and credit metrics deteriorate sharply for the full-year 2014 period, then negative rating action could be considered.

DBRS has simulated a default scenario for Norbord in order to analyze the potential recovery of the Company’s senior debt in the event of default. The scenario assumes a prolonged period of severe economic conditions, regardless of how hypothetical or unlikely the conditions may be, in which product demand and prices plummet. Based on the recovery analysis, DBRS believes that holders of the Senior Secured Notes would recover approximately 60% to 80% of the principal; therefore, the recovery rating remains at RR3.

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 methodologies are DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers and Rating Companies in the Forest Products Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.