DBRS Changes Trend on Norbord Inc. to Negative

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Norbord Inc. (Norbord or the Company) at BB, but changed the trend from Stable to Negative following the Company’s announcement that it has completed the merger with Ainsworth Lumber Co. Ltd. (Ainsworth) in an all-share transaction. The trend change reflects the deterioration of the Company’s financial risk profile post-merger because of the debt assumed from Ainsworth and weaker financial results at Ainsworth. All debt coverage ratios, on a pro forma basis, are aggressive for the current rating. Moreover, conditions in the oriented strand board (OSB) market have remained challenging and the timing of a meaningful recovery is uncertain. DBRS would downgrade the rating by one notch if Norbord fails to show steady progress in improving its financial performance and debt coverage metrics through 2015. Conversely, DBRS would change the trend back to Stable if the Company could strengthen its financial performance and restore the credit metrics to modestly above the pre-merger level. With this rating action, the Company is removed from Under Review with Negative Implications, where it was placed on December 9, 2014.

Even though the merger is financed by the issuance of Norbord shares, the addition of Ainsworth’s debt has led to a meaningful increase in debt at Norbord post-merger. Moreover, financial performance at both Norbord and Ainsworth has declined markedly in 2014 compared with 2013. The Company’s financial profile, on a pro forma basis, has deteriorated and is aggressive for the current rating. DBRS notes that the poor financial performance at both companies in 2014 were affected by weak OSB prices in North America. Even though demand has increased in line with a modest recovery in the residential construction sector through 2014, the increase in OSB supply as a result of the restart of a number of previously mothballed mills has depressed prices through 2014. However, an expected improvement in the OSB market has not materialized. Challenging winter conditions have held back construction activities so far in 2015 and OSB pricing remains under pressure. The timing of a sustainable recovery in residential construction activities in the United States is uncertain. The Company has estimated potential synergistic benefits from the merger, at about $45 million a year achievable over 18 to 24 months. However, the Company is unlikely to report meaningful improvement in financial results without more supportive market conditions, notwithstanding contributions from potential synergistic benefits.

DBRS notes that Ainsworth will modestly strengthen Norbord’s business risk profile with increased geographical and product diversity, market position and operational flexibility. The combined company is the market leader in OSB globally and in North America, the world’s largest OSB market. Ainsworth will meaningfully strengthen Norbord’s presence in the west coast regions of North America and will expand Norbord’s presence into Asia, especially Japan. Ainsworth will also expand and strengthen Norbord’s product offering with more value-added products and associated higher profit margins. Furthermore, the modest overlap in geographical coverage also offers opportunities in optimizing production facility utilization and lowering transportation costs.

DBRS would downgrade Norbord’s rating by one notch unless the Company could demonstrate steady improvement in financial results and all debt coverage metrics through 2015. Conversely, DBRS would change the trend back to stable if the Company could execute its integration with Ainsworth smoothly and strengthen all debt coverage metrics to at least modestly stronger than the pre-merger levels.

Pursuant to DBRS’s rating criteria on recovery ratings for non-investment grade corporate issuers, 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 default. DBRS has determined Norbord’s estimated value at default using an EBITDA multiple valuation approach and a 4.0x multiple of normalized EBITDA. Based on the default scenario, the Senior Secured Notes would have recovery estimated between 30% and 60%, which aligns with a recovery rating of RR4. Therefore, the recovery rating is downgraded to RR4 from RR3, and the lower recovery is primarily the result of the added debt from Ainsworth post-merger. Consequently, the instrument rating of the Senior Secured Notes is BB, which aligns with a recovery rating of RR4. Even though Norbord has a lower recovery rating, the rating of the Senior Secured Notes remains at BB with a Negative trend, the same as the Issuer Rating. Additionally, the rating of the Senior Secured Notes of Norbord (Delaware) GP I, guaranteed by Norbord, is also confirmed at BB with a Negative trend.

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 Rating Companies in the Forest Products Industry, DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

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

The Senior Secured Notes of Norbord (Delaware) GP I are guaranteed by Norbord Inc.

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