DBRS Changes Bowater Canadian Forest Products Inc. Tr to Neg

Dominion Bond Rating Service (“DBRS”) has today confirmed the rating of BB on Bowater Canadian Forest Products Inc., based on the parent Bowater Inc. (“Bowater” or the “Company”) but has changed the trend to Negative from Stable. While there is no formal guarantee of the subsidiary’s debt by Bowater, DBRS believes that the Canadian subsidiary is a vital operating unit of the parent and feels comfortable in emphasizing the consolidated Bowater in the rating.

The Company’s credit metrics have strengthened, but are below expectations, and are considered aggressive for the rating. Leverage is excessive but interest and cash flow coverage ratios are within the range associated with a BB rating. Bowater generated modest growth in earnings and cash flow over the past six months, the result of cost savings and higher paper and lumber prices. Further cost savings and product mix changes are expected to add US$80 million to operating earnings in 2006.

Acquisitions raised the Company’s leverage to over 50% in 2000, an aggressive level for a company with cyclical earnings. Poor pulp, paper, and building products markets in subsequent years prevented the Company from reducing debt. The sale of timberlands provided much needed cash in 2003 and Bowater still has substantial land assets that could be sold. Bowater’s current rating is also supported by: (1) a high earnings leverage to pulp, newsprint, and specialty groundwood papers, which will enable the Company to substantially increase earnings and cash flow when market conditions rebound; (2) minimal debt repayments until 2009, which provides the Company with the flexibility to focus on operating cash requirements; (3) cash and available credit facilities of US$392 million at June 30, 2005, which are more than sufficient to fund short-term cash requirements; and (4) easily monetized timberlands worth roughly US$450 million (roughly 18% of total debt at June 30, 2005) provide another source of liquidity.

Despite the recent improvements in Bowater’s earnings and cash flows, DBRS expects that further strengthening of the Canadian dollar and the negative impact of continuing high energy prices on transportation and chemical costs will negate Bowater’s recovery efforts. In addition, unfavourable currency and cost trends exacerbate the negative impact of weak pulp and paper markets and deteriorating building products fundamentals. As a result, the trend has been changed to Negative from Stable. To maintain the current rating Bowater must demonstrate the ability to continue to grow earnings and cash flow and materially improve its credit profile despite a challenging environment.

Note:
Issuer ratings apply to all general senior unsecured obligations of the issuer in question.