DBRS Confirms Norbord Inc. at BB, Trends Remain Negative

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Secured Notes of Norbord Inc. (Norbord or the Company) at BB. The trends remain Negative. The confirmations recognize that Norbord has improved its operating results, but its financial profile is still weak for the current rating. The Company reported sequential improvement in its quarterly results since its merger with Ainsworth Lumber Co. Ltd. (Ainsworth) on March 31, 2015. However, progress was below expectations due to worse than anticipated market conditions, especially in the first half of 2015. DBRS notes that oriented strandboard (OSB) prices are showing signs of a sustained recovery, as demonstrated by the solid results reported in Q1 2016, a seasonally weak period. Norbord has also made solid progress in improving Ainsworth’s operations and is on track to achieve all identified synergies from the merger. DBRS anticipates Norbord will maintain its solid period-over-period improvement supported by favourable market conditions. DBRS would take positive rating actions if the Company were to restore the credit metrics to modestly above the pre-merger level. However, failure to sustain the current improvement in operating results could lead to a one notch downgrade.

Norbord has made solid progress in integrating Ainsworth’s operations and raising productivity. A drop in material costs, especially resins due to weak oil prices, and a softer Canadian dollar have further helped to lower production costs. However, growth of construction activity in the U.S. has been slower than anticipated. Increased supply from the 2012/2013 restart of a number of mothballed mills in anticipation of a recovery in the U.S. housing sector, coupled with destocking in the distribution channel, depressed OSB prices in H1 2015. The Company’s operating results and financial profile have strengthened sequentially but only gathered momentum since Q3 2015, in line with market conditions. DBRS anticipates U.S. housing starts to remain below trend with a modest uptick in 2016 to less than 1.2 million units from 1.11 million in 2015. Nevertheless, capacity additions have subsided and no mill restarts have been announced for the next two years. DBRS expects OSB prices to strengthen along with improving supply/demand conditions. In addition, ongoing productivity gains, synergy savings and an inertly weak Canadian dollar should boost profits and operating cash flow at Norbord. DBRS expects internal cash generation to be strong and more than cover operating needs, despite the announced $135 million investment through to 2018 to expand the Company’s mill in Inverness, Scotland. The increased financial resources would allow Norbord to repay the maturing secured debt at Norbord (Delaware) GP I in Q1 2017 and strengthen the balance sheet.

DBRS has estimated that the Senior Secured Notes would have recovery between 30% and 60%, which aligns with a recovery rating of RR4 and so, 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 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 (April 2016), DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers (March 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

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