DBRS Confirms Ratings on 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) with Stable trends. The rating confirmations reflect DBRS’s expectation that current softness in the North American lumber market will not permanently affect Canfor’s credit metrics and business profile. While the effect of low lumber prices coupled with the debt funding of acquisitions will weaken the Company’s leverage metrics in the short term, the combination of recovering prices, the full-year contribution from acquired assets as well as some debt repayment will bring leverage back to levels that are commensurate with the current rating. Canfor’s investment-grade rating is supported by its low-cost operations, scale and low correlation between its lumber and pulp business lines; however, the rating remains constrained by the Company’s exposure to U.S. trade protectionist policies and foreign-currency fluctuations caused by a currency mismatch between its cost and revenue base.

In November 2018, Canfor announced its acquisition of Elliott Sawmilling Co. based in the Southern United States for a total consideration of USD 110 million (about $150 million), which added 210 million board feet of capacity. In November 2018, Canfor also announced its acquisition of 70% of VIDA Group of Sweden (VIDA) for a total consideration of about $580 million, which added VIDA mills’ total capacity of 1.1 billion board feet. The acquisition subsequently closed in February 2019. DBRS views these acquisitions as positive in light of the Company’s strategy to pursue international diversification and difficult operating conditions in British Columbia; however, Canfor more than doubled its debt as at March 31, 2019, compared with year-end 2018 which, together with lower earnings and cash flows, led to a sharp deterioration in credit metrics.

Since the second half of 2018, Canfor’s profitability declined as a result of the softer lumber pricing environment in North America, driven in part by levelling-off U.S. housing starts as well as difficult operating conditions in British Columbia. The Company’s EBITDA (as calculated by DBRS) declined to $627 million in the last 12 months (LTM) ended Q1 2019 compared with $806 million in 2017. Canfor and other Canadian competitors have announced both temporary and permanent curtailments out of British Columbia, which can potentially help to bring prices back to more economical levels. DBRS understands that additional curtailments will be necessary for prices and profitability to be sustainably restored.

Going forward, DBRS anticipates that the Company will proactively manage the current market softness such that credit metrics will return to levels that are more commensurate with the current rating. In addition, DBRS expects Canfor to continue the expansion of its Southern U.S. lumber footprint, integrate its recently acquired European assets and continue to invest in growth and maintenance projects to maintain its low-cost profile. Canfor remains well positioned to manage the inherent cyclicality of its underlying business as well as other challenges, including the softwood lumber dispute.

While Canfor’s financial profile has somewhat weakened in the LTM from very strong levels, 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 Canfor’s financial risk assessment by taking a forward-looking, normalized view of its performance. DBRS believes that current softness in the lumber markets will not negatively affect the Company’s financial and business risk profiles over the long term.

While currently unlikely, 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, DBRS may consider a negative rating action if a downturn occurs which causes DBRS to believe that there will be persistent market weakness and more impactful softwood lumber export duties or if the Company’s credit metrics do not improve to levels that are more commensurate with the current rating.

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 & 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.

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 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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