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West Fraser Timber Co. Ltd. -- Moody's changes outlook on West Fraser to stable; affirms Baa3

·15 min read

Rating Action: Moody's changes outlook on West Fraser to stable; affirms Baa3Global Credit Research - 01 Feb 2021Approximately $300 million of rated West Fraser bondsToronto, February 01, 2021 -- Moody's Investors Service, ("Moody's") changed West Fraser Timber Co. Ltd.'s (West Fraser) outlook to stable from negative and affirmed the company's Baa3 senior unsecured rating following its stock-for-stock acquisition of Norbord Inc. (Nordord, Ba1 Ratings Under Review) that closed today."West Fraser's Baa3 rating has been stabilized because we expect liquidity to be strong and leverage to be low over the next two years as it integrates the operations of Norbord," said Ed Sustar, Moody's Senior Vice President.Affirmations:..Issuer: West Fraser Timber Co. Ltd.....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3Outlook Actions:..Issuer: West Fraser Timber Co. Ltd.....Outlook, Changed To Stable From NegativeRATINGS RATIONALEWest Fraser's Baa3 rating benefits from: (1) its low cost and leading market position as the largest lumber producer in North America and now, after the Norbord Inc. acquisition, the largest oriented strand board (OSB) producer in the world; (2) additional diversity through West Fraser's cost-competitive North American plywood, pulp and newsprint operations, as well as Norbord's European panel business; (3) strong liquidity; and (4) robust interest coverage (EBITDA/Interest around 20x) and leverage (Debt/EBITDA around 1x) pro forma 2020 with Norbord.West Fraser is constrained by the: (1) inherent price volatility of its products (most are currently well above normalized levels); (2) the company's concentration on the cyclical home construction and renovation / remodeling end markets; and (3) reduced fiber supply for the company's British Columbia operations (about 27% of it lumber capacity) from the impacts of the mountain pine beetle infestation, higher than normal wild fires and pending Woodland caribou protection measures.As part of the transaction, West Fraser has secured $1.3 billion in committed credit facilities, which may be used to redeem Norbord's $665 million of bonds, which has a change of control put. Given recent trading prices, it is uncertain if Norbord's bonds will be put. If Norbord's rated debt is assumed by West Fraser in a manner that leaves Norbord's bonds essentially pari passu with West Fraser's senior unsecured notes, Norbord's bonds will likely be rated in-line with West Fraser's rating. If this does not occur, Norbord's bond rating will be based on the stand-alone credit profile of Norbord plus anticipated support from West Fraser (subject to receiving adequate financial information to determine and maintain the Norbord bond rating).West Fraser has strong liquidity supported by over C$3 billion of liquidity sources with no significant debt maturities over the next 12 months. Liquidity sources include a cash balance of C$313 million (as of September 30, 2020) and fully available C$850 million and US$450 million revolving credit facilities that mature in 2024. Moody's estimates that West Fraser (with Norbord's operations) will generate about C$1.4 billion of cash over the next four quarters. Most of West Fraser's assets are unencumbered. We expect West Fraser will remain in compliance with its financial covenants.The stable outlook reflects our expectation that leverage will remain strong over the next 12 to 18 months. Lumber and OSB prices are expected to remain strong in 2021 (up 5% and 10% respectively from average 2020 levels), as pulp prices rebound (benchmark NBSK prices up 8% in 2021) from near trough levels.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWest Fraser's rating could be upgraded if:** Diversification away from the very cyclical lumber, OSB and pulp markets** Resolution of the softwood lumber dispute between Canada and the US** Greater certainty around the longer-term impacts on the company's fiber supply from environmental risks** Adjusted debt/EBITDA sustained below 2.5x (1.2x as of September 2020) based on our forward view of financial performanceWest Fraser's rating could be downgraded if:** Sustained deterioration in the company's operating environment or liquidity** Adjusted debt/EBITDA exceeds 3x (1.2x as of September 2020) based on our forward view of sustained financial performanceThe principal methodology used in these ratings was Paper and Forest Products Industry published in October 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1105007. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Headquartered in Vancouver, British Columbia, West Fraser is the largest lumber producer in North American and following the acquisition of Norbord, the largest oriented strand board (OSB) producer in the world. Net sales for the last twelve months ending September 2020 for the combined entity was C$8 billion.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Ed Sustar Senior Vice President Corporate Finance Group Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Donald S. Carter, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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