DBRS Confirms Ratings on Canfor Corporation, Changes Trend to Stable from Negative

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Notes rating of Canfor Corporation (Canfor or the Company) at BBB (low). The trends have been changed to Stable from Negative. A combination of debt-financed acquisitions and weak operating results from the Company’s primary lumber business line had raised concerns about Canfor’s financial profile; however, in the last 12 months ended Q1 2017 (LTM Q1 2017), Canfor has delivered very strong operating results, reduced debt, and notably restored all key credit metrics. The investment-grade rating remains supported by the Company’s low-cost operations, scale and the relatively low correlation between the markets for its lumber and pulp operations. Those business lines remain prone to volatile price swings, however, and U.S. trade protectionism is negatively affecting Canfor directly.

Consolidated sales and earnings improved markedly in LTM Q1 2017 and F2016 compared with F2015 as improved results from Lumber operations dominated weakness in the Pulp and Paper division. Canfor’s Lumber business benefited from the acquisitions of specialty products producer, Wynndel Box & Lumber Ltd., in British Columbia along with the remaining stakes of Alabama-based Scotch & Gulf Lumber Co. as well as Georgia-based Beadles Lumber Company and Balfour Lumber Company. These acquisitions were consistent with Canfor’s strategic goals of acquiring more lumber-producing assets in the Southern United States and increasing its value-added/specialty products capacity. The solid operating results and continued pause on the Company’s share buyback program enabled Canfor to reduce its debt load by $163 million during the period.

Although Canfor has been targeted by the U.S. Department of Commerce with among the highest duty rates for its lumber exports to the United States, the overall impact on the Company is expected to be manageable. DBRS anticipates that, at some point, a negotiated settlement will be reached and Canfor will receive refunds for the majority of the cash deposits it is currently required to post. The Company plans to continue its strategy of acquiring U.S.-based lumber assets and increasing its capacity to produce value-added products. These actions should continue to strengthen Canfor’s business profile over time. The Company’s financial risk profile is currently very strong after the material weakening experienced in 2015. Although Canfor intends to reinstitute its share buyback program, DBRS does not expect the financial profile to weaken materially.

Despite the very strong financial profile, the swing observed from 2015 to the current period illustrates the sector’s volatility. Coupled with Canfor’s willingness to debt-finance material acquisitions, it is improbable that the Company will be able to diversify its operations sufficiently in the near term to achieve a rating upgrade. Should debt-financed acquisitions increase leverage and a market downturn severely weaken Canfor’s financial profile, DBRS may consider a negative rating action.

Notes:
All figures are in Canadian 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 methodology is Rating Companies in the Forest Products Industry, which can be found on dbrs.com under Methodologies

This rating is no longer endorsed by DBRS Ratings Limited for use in the European Union.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.