Domtar Corp.'s Proposed US$250 Million Senior Unsecured Notes Rated 'BBB-'; Ratings Unaffected By Criteria Change
TORONTO (Standard & Poor's) Nov. 20, 2013—Standard & Poor's Ratings Services today said it assigned its 'BBB-' issue-level rating to Montreal-based pulp and paper producer Domtar Corp.'s proposed US$250 million senior unsecured notes. The notes rank equally with all of the company's existing unsecured obligations. We understand that the proceeds from the proposed notes will be used to partially fund Domtar's recently announced acquisition of Spain-based manufacturer of sanitary and hygienic products Laboratorios INDAS. At the same time, Standard & Poor's reviewed its ratings on Domtar, which it labeled as "under criteria observation" after publishing of its revised corporate criteria on Nov. 19. Standard & Poor's expedited the review of its ratings on Domtar because the company recently proposed to issue debt (see "How Standard & Poor's Plans To Finalize--And Apply--Its Corporate Ratings Criteria, " published Nov. 13, 2013). With our criteria review of Domtar complete, we have confirmed that our ratings on this issuer are unaffected by the criteria changes. We estimate Domtar's debt-to-EBITDA ratio to increase to 2.5x pro forma for the acquisition from 2.2x as of Sept. 30, 2013. Our 'BBB-' long-term corporate credit rating on Domtar reflects our view that the company will be able to deleverage following the partially debt-financed INDAS acquisition, such that leverage falls below 2x and funds from operations to debt exceeds 40% by year-end 2014. Based on these metrics, we assess Domtar's financial risk profile to be "intermediate." We expect acquisition-driven earnings growth from Domtar's personal care segment to provide an offset to earnings lost from diminishing uncoated free sheet consumption due to electronic substitution. Still, we believe the acquisition will not affect our "fair" business risk profile assessment at this time given that forecasted EBITDA from the company's pulp and paper segments will account for about 80% of EBITDA in 2014. "The stable outlook on Domtar reflects our expectations that the company will continue to generate strong cash flow from operations," said Standard & Poor's credit analyst Rahul Arora. "Furthermore, although Domtar might continue with shareholder-friendly returns, we believe it its adjusted leverage ratio will be below 2x by year-end 2014," Mr. Arora added. RELATED CRITERIA AND RESEARCH Related criteria
- Corporate Methodology, Nov. 19, 2013
- Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
- Methodology And Assumptions: Liquidity Descriptors for Global Corporate Issuers, Nov. 19, 2013
- Corporate Criteria: Ratios and Adjustments, Nov. 19, 2013
- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
RATINGS LIST Domtar Corp. Corporate credit rating BBB-/Stable/-- Ratings Assigned Proposed US$250 sr secured notes BBB-
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