DBRS Confirms Ratings of Canfor Corporation at BBB (low), Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Notes rating of Canfor Corporation (Canfor or the Company) at BBB (low). The trends are Stable. In the last 12 months (LTM) ended Q1 2018, the Company delivered strong operating results, driven by the steady increase in U.S. housing starts, as well as the solid performance of its pulp division, which strengthened Canfor’s key credit metrics. The investment-grade rating is supported by Canfor’s low-cost operations, scale and low correlation between its lumber and pulp business lines. However, the Company’s profitability remains prone to its exposure to volatile end markets, U.S. trade protectionist policies and material exposure to foreign currency fluctuations due to a currency mismatch between its cost and revenue base.

Canfor achieved a marked improvement in profitability in the LTM ended Q1 2018 and F2017 as compared with F2016, primarily driven by a stronger pricing environment and an uptick in demand for both lumber and pulp, despite the impact of softwood lumber export duties, higher unit manufacturing costs and a stronger Canadian dollar. As a result of these dynamics, EBITDA (DBRS calculation) increased to $905 million in the LTM ended Q1 2018 — almost double the F2016 level. The strong profitability levels bolstered operating cash flows, which enabled Canfor to renew its normal-course issuer bid. In addition, in Q4 2017 the Company’s pulp business repaid its $50 million term debt more than two years in advance.

Although Canfor has been targeted by the U.S. Department of Commerce with among the highest duty rates for its lumber exports, the overall impact on the Company has been, and is expected to remain, manageable. DBRS anticipates that, at some point, a negotiated settlement will be reached and that Canfor will receive cash refunds for most of the cash deposits it is currently required to post. The Company plans to continue its strategy of acquiring U.S.-based lumber assets, which should strengthen its business profile over time.

Going forward, DBRS anticipates that the Company will continue to benefit from the currently strong market dynamics, expansion of its Southern U.S. lumber footprint and continued investment in growth and maintenance projects to maintain its low-cost profile. Therefore, Canfor remains well positioned to manage the inherent cyclicality of its underlying business, as well as other challenges, including the softwood lumber dispute. The current financial metrics are very strong and provide some buffer should the current cycle enter a downturn. In the near term, DBRS anticipates that Canfor will utilize its free cash flow for the acquisition of Southern U.S. lumber and value-added wood-products assets, as well as the continuation of its share buy-back program. A continuation of very strong credit metrics and an improvement in the Company’s business risk profile could lead to a positive rating action. On the other hand, in the event of a market downturn or more impactful softwood lumber export duties or should the Company’s strategy to debt-finance acquisitions materially weaken the financial profile, DBRS may consider a negative rating action.

Notes:
All figures are in Canadian 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.

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 for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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.