Fitch Expects to Rate Abitibi-Consolidated Inc.'s New Debt 'CCC/RR1'; Outlook Negative

2008-04-01 23:50:56 -

- Fitch Ratings expects to assign a 'CCC/RR1' rating to Abitibi-Consolidated Inc.'s (ACI) new $400 million 364-day senior secured term loan (term loan) and new $413 million senior secured 13.75% notes due 2011 (secured notes). ACI's new 15.5% senior unsecured notes due 2010 being issued as partial consideration for the tender of upcoming maturing bonds have been assigned an expected rating of 'CC/RR4'. In addition, Fitch has affirmed all of ACI's ratings and removed them from Rating Watch Negative, where they were placed on March 11, 2008. The Rating Outlook is Negative. The rating assignments are contingent on the probable completion of ACI's $1.4 billion refinancing package which also includes a $350 million 8% convertible notes offering. A portion of the net proceeds from the refinancing will be used to repay ACI's secured bank revolver maturing later this year, whose ratings will be withdrawn.

The ratings on the term loan and the secured notes reflect a superior collateral coverage securing that indebtedness. The term loan is secured by accounts receivable not sold, inventory and ultimately by ACI's interest in the Alabama River and Augusta GA pulp and paper mills. Fitch estimates that a distressed value of these assets is worth more than 2 times (x) the principal amount of the term loan. The secured notes are collateralized by ACI's ownership interests in 13 pulp and paper mills, 15 sawmills, four other lumber re-manufacturing facilities and the company's ownership interests in eight hydroelectric facilities plus other tangible and intangible assets. Fitch believes that at distressed values the secured notes are covered close to 3x. The unsecured indebtedness of ACI is estimated to have a 30% or so potential recovery factor, behind ACI's secured obligations.

ACI's Issuer Default Rating (IDR) and unsecured ratings reflect the still considerable challenges facing the company's predominantly Canadian newsprint and lumber businesses. These include shrinking demand from newsprint publishers in the case of the former and a poor U.S. residential construction market in the case of the latter. Both businesses are also being squeezed by inflationary cost factors, principally the cost and economic availability of wood, wood chips and the price of energy. Margins have also been pressured by the declining value of the U.S. dollar in which ACI's products are sold. Fitch believes that if these trends remain unchanged, the liquidity issues that ACI has just avoided could reappear within a year.

The following debt ratings and IDR of Bowater, Inc. (BOW), ACI's sister company, Bowater Canadian Forest Products Inc., and the IDR of AbitibiBowater Inc. (ABH), ACI's parent, are affirmed and removed from Rating Watch Negative; the Rating Outlook is Negative.

Abitibi-Consolidated Inc.

-- IDR 'CC';

-- Long-term unsecured 'CC/RR4';

-- Long-term secured 'CCC/RR1'.

AbitibiBowater Inc.

-- IDR 'CCC'.

Bowater Incorporated

-- IDR 'CCC';

-- Senior unsecured debt 'CCC/RR4';

-- Secured revolver 'B/RR1'.

Bowater Canadian Forest Products Inc.

-- IDR 'CCC';

-- Senior unsecured debt 'B-/RR2';

-- Secured revolver 'B/RR1'.

ACI is the largest Canadian newsprint producer in North America with 15 paper mills and a major producer of supercalendered, high-bright and directory papers in addition to lumber for residential and commercial construction. ACI is a wholly owned subsidiary of ABH, which was formed by the combination of ACI and BOW on Oct. 29, 2007.

Fitch's rating definitions and terms of use of such ratings are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings
Dennis Ruggles, CPA, +1-312-606-2318 (Chicago)
Sean Sexton, CFA, +1-312-368-3130 (Chicago)
Brian Bertsch, +1-212-908-0549
(Media Relations, New York)