DBRS Confirms Ratings on West Fraser Timber Co. Ltd. at BBB (low), Trends Remain Positive

DBRS Limited (DBRS) confirmed the Issuer Rating and Unsecured Debentures rating of West Fraser Timber Co. Ltd. (West Fraser or the Company) at BBB (low). The trends on all ratings remain Positive. The rating confirmations reflect DBRS’s expectation that current softness in the North American lumber market will not permanently affect West Fraser’s credit metrics and business profile. Furthermore, even though West Fraser’s EBITDA and cash flow are expected to be much lower in 2019 than in 2018 because of low lumber prices, the Company’s credit metrics remain strong for the rating category, despite the current softwood lumber duties. West Fraser’s investment-grade rating continues to be supported by its ongoing commitment to maintaining a conservative financial policy; its low-cost operations, which have enabled positive cash flow generation, even during market downturns; and its access to sufficient high-quality wood fibre.

Since the second half of 2018, West Fraser’s profitability declined as a result of the softer lumber pricing environment in North America, driven in part by the 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 $1,073 million in the last 12 months (LTM) ended Q1 2019 compared with $1,329 million in 2018 and full-year 2019 EBITDA is expected to decrease by more than 50% from current levels. During the first quarter of 2019, West Fraser drew under its revolving credit facility to manage liquidity through the typical seasonal log build period, but DBRS expects that some drawings will remain outstanding at year-end 2019 as a consequence of the current market softness; DBRS views this added debt as temporary and expects it to be repaid once liquidity needs lessen. In both 2019 and 2020, the Company’s credit metrics are expected to be weaker than in 2018, but still strong for the current rating. West Fraser 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 stay strong and improve from current rating levels. In addition, DBRS expects West Fraser to continue the expansion of its Southern U.S. lumber footprint through capital projects and continue to invest in growth and maintenance projects to maintain its low-cost profile. The Company remains well positioned to manage the inherent cyclicality of its underlying business as well as other challenges, including the softwood lumber dispute.

While West Fraser’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 West Fraser’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.

DBRS may consider upgrading the ratings in the near term if the market environment recovers as it has in past and if the Company remains committed to a conservative financial policy which, together, lead to the continuation of strong credit metrics. DBRS may consider a negative rating action, however, if a sustained 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 weaken to levels that are no longer consistent 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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