DBRS Changes Trend on Norbord Inc. to Positive and Confirms Ratings

DBRS Limited (DBRS) changed the trend on the Issuer Rating and the Senior Secured Notes rating of Norbord Inc. (Norbord or the Company) to Positive from Stable and confirmed the Company’s Issuer Rating at BB. The recovery rating remains unchanged at RR3, and therefore, DBRS also confirmed Norbord’s Senior Secured Notes rating at BB. The trend change reflects DBRS’s expectation that Norbord’s very strong financial profile, resulting from an extremely strong operating performance achieved in 2017 and Q1 2018, is likely to persist in the near term as a result of the favourable oriented strand board (OSB) market outlook in North America and Europe as well as the continued progress made by Norbord toward growing its Specialty product lines, which are not directly correlated with commodity OSB and OSB-linked product markets and pricing. The ratings remain supported by Norbord’s leadership position in its key North American and Western European markets, its low-cost operations and its broad operating footprint in its key markets. Despite some progress made toward diversifying its operations, the Company remains substantially exposed to the volatile wood panel end markets, especially for commodity OSB and OSB-linked product lines.

A stronger OSB pricing environment in North America and Europe, coupled with capacity utilization well over 90% and continued cost reduction progress, has driven a sound improvement in the Company’s profitability despite the impact of rising resin costs and higher expenses for ramping-up operations. The EBITDA margin rose to 32% in the last 12 months ended Q1 2018 period versus 21% in F2016. Shipments continued to trend steadily upward. As a result of these dynamics, EBITDA rose to $735 million (DBRS calculation) in the period, almost double the F2016 level, which, in turn, bolstered cash flows from operations to $576 million compared with $316 million in F2016 and $43 million in F2015. The substantial liquidity generated from operations over the last two years enabled Norbord to steadily increase its dividend to CAD 0.60 per share, matching the per-share payout amount in 2014 before the merger with Ainsworth Lumber Co. Ltd., which resulted in a material increase in debt and a reduction in the dividend. Debt levels have remained flat over the prior year, consistent with the Company’s pledge that the $200 million note redemption in February 2017 was a permanent deleveraging.

While Norbord’s financial profile has strengthened in the last 12 months, its ratings remain constrained due to its exposure to cyclical/volatile end markets. As per DBRS’s methodology for Rating Companies in the Forest Products Industry, given that forest products are among the more volatile industries, the weighting of the financial profile versus the business risk profile is even less than in other sectors. That said, although demand and supply shocks are always a concern in wood panel markets, DBRS feels that visibility on near-term conditions suggests that markets are likely to remain tight, at least well into 2019.

The Company’s business risk profile is benefiting from its strategy of increasing the proportion of Specialty products in its mix by providing some diversification benefits and reducing relative exposure to construction/housing activity. While increasing production of products targeting, for example, furniture manufacturing and engineered packaging markets (which have different underlying economic drivers) is a positive development, these product segments are affected by the volatility of the business cycle.

While exposure to a volatile end market is a hallmark of Norbord’s primary business line, current conditions are very strong, and given projected demand, the materially reduced supply overhang in North America and the dearth of any material new supply in Europe, the tight market conditions are likely to continue in the near term. Should the market environment remain well supported as expected, and should the Company remain committed to expanding its specialty product business, DBRS will likely upgrade the rating over the next six to 12 months. However, should a severe downturn set in, driven by unsustainably high new capacity additions that could be a harbinger of persistent market weakness for a period of years, DBRS would likely remove the Positive trend and may consider a negative rating action.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating Companies in the Forest Products Industry, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS did have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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