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

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Norbord Inc. (Norbord or the Company) at BB. DBRS has determined that the Company’s Senior Secured Notes would have recovery estimated between 30% and 60%, which aligns with a recovery rating of RR4 and, hence, the instrument rating of the Senior Secured Notes and the Senior Secured Notes of Norbord (Delaware) GP I, guaranteed by Norbord, are also confirmed at BB. All trends are Negative. The trend on the Company’s rating was changed to Negative from Stable on April 1, 2015 (see related press release for details), following the completion of the merger with Ainsworth Lumber Co. Ltd. in an all-share transaction. DBRS notes that the merger has strengthened Norbord’s business profile, solidifying its leadership position in oriented strand board (OSB) with increased geographical and product diversity as well as operational flexibility. Norbord’s financial profile on a pro forma basis is, however, weak for the current rating. The Negative trend reflects that the rating is at risk unless Norbord can restore or make steady, meaningful progress to strengthen its financial profile to be compatible with the current rating.

A recovery in OSB prices is critical for Norbord to improve its credit metrics. Norbord has stated that a $10 increase in OSB price is expected to add about $50 million to EBITDA annually, based on 11 operating North American mills. Even though Q1 2015 results were disappointing, recent industry developments are supportive of higher OSB prices: (1) renewed vigour in residential construction activities in the United States boosting future demand for OSB; (2) no scheduled mill restart in 2015 to increase supply pressure (the ramp-up of six restarted mills resulted in an oversupplied market and a sharp drop in OSB prices in 2014); and (3) low inventory in the supply chain. The Company has demonstrated that its operating results would turn around strongly in a favourable demand and pricing environment, such as in 2013. The Company has also executed a series of financial transactions, increasing debt capacity marginally, extending some debt maturities and lowering interest costs, to improve its financial flexibility. The announced reduction in dividend payout (from CAD 0.60 per share to CAD 0.25 per share) would further bolster cash resources.

However, the timing of a sustained recovery in the U.S. housing sector is still uncertain despite recent improvements. 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 strengthens its performance and restores the credit metrics to modestly above the pre-merger level

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 Inc. are guaranteed by Norbord Inc.