DBRS Confirms Ratings on Norbord Inc. at BB, Trends Remain Positive

DBRS Limited (DBRS) confirmed the Issuer Rating as well as the Senior Secured Notes (the Notes) rating on Norbord Inc. (Norbord or the Company) at BB. The recovery rating on the Notes remains at RR3 and the trends on all ratings remain Positive. The confirmations reflect DBRS’s expectation that the current softness in the North American oriented strand-board (OSB) market is temporary and will not permanently affect Norbord’s credit metrics and business profile. Furthermore, even though 2019 EBITDA and cash flow are expected to be much lower than in 2018, the Company’s credit metrics remain strong for the rating category. 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 key markets. The Company has also made some progress in diversifying its operations toward specialty products, but Norbord remains substantially exposed to volatile wood-panel end markets, especially for commodity OSB and OSB-linked product lines.

Since the second half of 2018, a softer OSB pricing environment in North America driven by new capacity coming online in 2019 combined with levelling off U.S. housing starts has led to a sharp decline in the Company’s profitability, amplified by the impact of rising wood and energy costs as well as the temporary curtailment of some of their mills. The European operations, however, posted solid performance led by higher mill realizations, volumes and operating rates. In the last 12 months ended Q1 2019 (LTM Q1 2019), the Company’s EBITDA margin decreased to 26% from about 30% in both 2017 and 2018. Shipments in both North America and Europe continued to trend steadily upward. Despite higher volumes, EBITDA decreased to $540 million (DBRS calculation) in the LTM Q1 2019, approximately 25% lower than in 2018 and 19% lower than in 2017. As a result of these dynamics and, as it has done in past periods of market softness, the Company cut its dividend to CAD 0.40 per share in Q1 2019 from CAD 0.60 to preserve liquidity. In Q1 2019, Norbord drew $80 million on an accounts receivable securitization program, which led to increased debt levels compared with December 31, 2018; however, DBRS views these drawings as temporary and expects them to be repaid once liquidity needs lessen. Overall debt levels remain comfortable for the rating category and DBRS continues to view positively the Company’s pledge that the $200 million note redemption in February 2017 was a permanent deleveraging.

While Norbord’s financial profile has weakened in the last 12 months, which is directly correlated to its exposure to cyclical/volatile end markets, DBRS views the Company’s business risk profile as mostly unchanged. As per DBRS’s “Rating Companies in the Forest Products Industry” methodology, given that forest products are among the more volatile industries, DBRS recognizes and adjusts for these fluctuations in the determination of Norbord’s financial risk assessment by taking a forward-looking, normalized view of its performance. That said, although demand and supply shocks are always a concern in wood-panel markets, DBRS believes that the current softness in OSB pricing is similar to that experienced in the past and believes that both Norbord’s financial and business risk profiles will not be negatively affected over the long term.

If a downturn sets in which causes DBRS to believe that there will be persistent market weakness, DBRS would likely remove the Positive trend and may consider a negative rating action. However, if the market environment recovers as it has in past and if the Company remains committed to expanding its specialty product business, DBRS will consider upgrading the ratings in the near term.

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

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

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 had 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 addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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