DBRS Confirms Norbord Inc. at BB and Changes Trend to Stable; Discontinues Norbord (Delaware) GP I

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Secured Notes rating of Norbord Inc. (Norbord or the Company) at BB. The trends have been revised to Stable from Negative and the recovery rating on the Senior Secured Notes has been revised to RR3 from RR4, primarily reflecting debt repayment. DBRS has also discontinued the Senior Secured Notes rating of Norbord (Delaware) GP I (Norbord Delaware), an affiliate of Norbord, as the notes (issued by Norbord Delaware and guaranteed by Norbord) were repaid upon maturity.

The revision of the trend to Stable primarily reflects the Company’s strong operating performance that has been well above DBRS’s expectations over the last 12 months and the associated improvement in key credit metrics to levels well above the current rating range, which is typical of credits in highly cyclical industries. Today’s action also reflects the achievement of targeted synergies of $45 million per year associated with the March 31, 2015, merger with low-cost, Canadian-based, oriented-strand board (OSB) producer, Ainsworth Lumber Co. Ltd (Ainsworth), ahead of schedule. This additional capacity supported returns as OSB markets recovered through 2016 and strengthened into Q1 2017. The trend change also recognizes the debt repayment, which has reduced leverage that had increased as a result of the Ainsworth acquisition. DBRS does not anticipate any material impact on Norbord’s business from potential changes in Canada-U.S. trade relations.

OSB pricing in North America in 2016 and into Q1 2017 was supported by the steady recovery in the U.S. housing market, especially single-unit dwellings, despite some unfavourable weather impacts in March 2017. Benchmark pricing has shown material improvement and Norbord’s capacity utilization of well above 90% has driven excellent improvements in profitability. In Europe, demand growth in the United Kingdom and Germany reflected, in part, the secular trend toward greater acceptance of OSB as a building material option at the expense of plywood. Although petroleum-based resin costs began rising in recent quarters, in the last 12 months ended Q1 2017, the Company has been benefiting from lower energy costs, further gains under its margin improvement program and the Ainsworth synergies.

EBITDA rose 241% to $416 million (DBRS calculation) in the period versus F2015 and cash flow from operations jumped to $361 million, resulting in a free cash flow surplus of $179 million. Cash and temporary drawings on Norbord’s accounts receivable securitization program were used to repay the $200 million Norbord Delaware notes in what the Company has referred to as a “permanent” deleveraging action, which should reduce annual interest expenses by $15 million.

Although the financial profile has rebounded strongly, the Company’s rating remains constrained in the BB range by its exposure to volatile end markets. Competitors’ capacity additions coming online at a faster-than-expected pace is a potential concern as are economic conditions in the United States, which may affect housing demand. Norbord is continuing to increase the proportion of higher value-added and specialty products in its mix, which may help to achieve less cyclical earnings volatility over the long term. DBRS will be monitoring the Company’s progress, the durability of the currently favourable market conditions and Norbord’s ability to establish that its new leverage position is indeed permanent. These factors may support an additional positive rating action going forward.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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