Fitch Affirms Plum Creek's Ratings at 'BBB-'; Outlook to Negative

2008-11-08 09:39:01 -

- Fitch Ratings has affirmed Plum Creek Timber Company's (PCL) ratings as follows:

--Issuer Default rating at 'BBB-';

--Senior unsecured bond at 'BBB-';

--Bank revolver and term loans at 'BBB-'.

The ratings have been assigned a Negative Outlook as existing high leverage is not expected to improve, while business conditions are expected to weaken.

Increasing leverage, the product of stock repurchases and dividends, timberland acquisitions and a steady but not growing string of operating profits, has been increasing the leverage on PCL's timberlands. Net debt/EBITDA has been rising, to 4.6 times (x) at the close of the third quarter and up from just over 4.0x at the end of last year, while interest coverage has been falling. Liquidity remains good with cash in excess of $270 million and nothing drawn on PCL's $750 million in credit facilities.

Next year does not promise the earnings relief necessary to reverse the trend in leverage, which alternatively could come from timberland asset sales. Fitch suspects that sawlog harvests and/or prices will fall next year with another reduction in North American lumber production due to the weak housing market. Similarly, pulpwood prices and/or harvests are likely to soften following the recent trend in market pulp prices. The decline in the latter can be traced to the waning demand for nearly all grades of paper in North America excluding tissue, weakening box markets, and the slowdown in China due in part to slowing exports to the United States. If timberlands hold their appreciated long-term values next year, in contravention to the depressed lumber, paper and housing markets which indirectly figure into their valuations, it is expected fewer properties will change hands, which could also affect PCL's earnings, excluding sales already negotiated.

PCL's recent timberland joint venture with The Campbell Group this past October has had little effect on leverage. For accounting purposes PCL in consolidation has received common and preferred interests in the joint venture equal to the book value of 454,000 contributed acres and taken back cash and a loan of $783 million. Fitch has elected to net the value of PCL's interests in the joint venture against the loan, and PCL has used a portion of the proceeds to retire $507 million in debt and repurchase $172 million of common stock.

Further negative rating actions could follow additional borrowing to finance stock repurchases which raise leverage ratios above 6x net debt/EBITDA.

Additional information on PCL can be found on the Fitch Ratings web site at www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public 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. The ratings above have been initiated by Fitch as a service to investors. The issuer did not participate in the rating process other than through the medium of its public disclosure.

Fitch Ratings, Chicago
Dennis Ruggles, CPA, +1-312-606-2318
Sean Sexton, CFA, +1-312-368-3130
Media Relations, New York
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com