DBRS Confirms Domtar Corporation at BBB (low) with Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes rating of Domtar Corporation (Domtar or the Company) at BBB (low) and has maintained the Stable trend. This action reflects the stable business risk profile despite marginal weakening of the assessment of the Company’s fibre supply strength due to a change in DBRS’s methodology, and a modest decline in EBITDA operating earnings, offset by lower interest expenses as a result of the refinancing undertaken in 2015. These dynamics led to mixed movements in key credit metrics, but overall the financial profile remains strong for the rating.

The key development during the last 12 months (LTM) period through September 2016 was the conversion of the paper machine at Ashdown, Arkansas to a fluff pulp line. The permanent reduction of 364,000 short tons of uncoated freesheet capacity became effective on March 31, 2016, and qualification of the fluff pulp output began in Q4 2016. A pulp bale line at Ashdown began producing papergrade softwood pulp in Q3 2016. This led to reduced paper shipments during the period, offset only partially by the pulp ramp-up and continued solid top-line growth performance from the Personal Care segment. Margins were buffeted by the integration costs associated with several acquisitions in the Personal Care segment in recent years. Although this business segment constituted only 17% of sales (LTM September 2016) and only slightly more in terms of EBITDA before corporate expenses, it provides a platform for higher margin growth, as operations become more efficient and the business makes up a greater proportion of total revenues. The Company is targeting EBITDA margins in the higher teens from Personal Care over the longer term (currently 14%). Improved operating cash flows during the period allowed Domtar to cover higher capital expenditures (primarily associated with the Ashdown conversion) and elevated dividend outlays with internally generated cash. However, operating and other working capital needs required some debt financing, resulting in a modest increase in debt drawings.

The business risk profile remained largely unchanged, but with the addition of the Ashdown volumes, expectations are for gradual improvement in the years ahead. The financial risk profile remains strong for the rating, and the Company enjoys a significant amount of cushion for the current rating.

Overall, results from the LTM period through September support the current rating. Domtar would need to achieve a material, sustained improvement in its operations for DBRS to consider an upgrade. The Ashdown volumes would go some distance to supporting this. In lieu of a material, sustained drop in operating conditions, DBRS does not anticipate a downgrade from the current rating in the near term.

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 (April 2016), which can be found on our website under Methodologies.

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.

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