DBRS Confirms Domtar Corporation at BBB (low), Stable

DBRS Limited (DBRS) has today confirmed Domtar’s (Domtar or the Company) ratings at BBB (low), with a Stable trend, which reflects that the Company has performed in line with expectations of maintaining strong credit metrics and stabilizing its EBITDA level. It also reflects Domtar’s progress in improving its business risk profile with growth in the personal care business through prudent acquisitions to decrease the reliance on the commodity paper business. The Stable trend reflects DBRS’s view on Domtar’s ability to maintain investment grade credit metrics going forward based on adequate EBITDA generation from its core commodity paper business, despite a temporary increase in import competitions. DBRS views the planned growth in the personal care business positive, which would further strengthen Domtar’s business profile. However, DBRS notes that excessive debt-financed acquisitions which materially weaken the Company’s credit metrics would put Domtar’s ratings at risk.

Domtar’s credit metrics remained strong in the nine-month 2014 period and EBITDA generation reversed the declining trend. However, improvements were short of DBRS’s expectations based on last year’s industry capacity reductions. While the closure of approximately 10% industry capacity helped to moderate the ongoing secular decline in North America paper demand, an unexpected material increase in imports negatively impacted Domtar’s performances. DBRS views the increase temporary and driven by excess capacity and lower prices in the Asian market. DBRS also notes that there is no major additional capacity in their pipeline; therefore, once their domestic prices become more profitable, the imports should decline. In the meantime, DBRS views the effects of imports manageable for Domtar given the size of the increase in relation to the overall industry; which on a full year basis, only accounts for about a quarter of the 10% industry capacity reduction. Going forward, DBRS expects Domtar to generate adequate EBITDA in 2015 from its core paper business and be able to support the planned growth in the personal care business, despite import competitions.

DBRS recognizes Domtar’s progress in improving its business profile with the growth in the personal care business: nine-month sales in 2014 increased by 75% from the previous period. DBRS expects the Company to continue to do so by reducing dependency on the declining North America commodity paper business and expanding in the growing personal care market through prudent acquisitions. Moreover, DBRS expects the Company to remain conservative in its share repurchase program in respect to cash considerations as demonstrated in 2014; i.e., share buybacks totalled $19 million compares to $183 million. DBRS notes that although the Company’s financial profile has some cushion to absorb moderate debt increases, an excessive debt-financed acquisition that pushes the adjusted debt-to-EBITDA ratio to be greater than 3.0 would put the current rating at risk.

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, which can be found on our website under Methodologies.

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

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.