DBRS Confirms Smurfit-Stone Container Corporation at B(high)

Dominion Bond Rating Service (“DBRS”) has today confirmed the rating of Smurfit-Stone Container Corporation (“Smurfit-Stone” or the “Company”) at B (high). The trend is Stable.

The financial profile of Smurfit-Stone remains on track for the rating. The corrugated packaging industry has been oversupplied in the past four years and the Company’s heavy reliance on this sector results in a business risk that is greater than the forest product industry’s average. Smurfit-Stone’s operating performance has remained under pressure over the past year and debt levels are high but acceptable for the current rating.

Smurfit-Stone is highly levered to North American packaging market conditions. Continuing excess packaging supply has limited significant price appreciation, despite demand growth that has been driven by the U.S. economy. In addition, cost pressures, including high energy, chemical, freight, and fibre prices, have contributed to weak operating performance and are showing few signs of abating. The greatest risk facing the Company is a North American recession, particularly given its continuing high leverage. Smurfit-Stone would have limited financial flexibility to fund large free cash flow losses in the event of sharply lower earnings. However, DBRS does not expect this to occur over the near term, and the downside risk to the current rating is limited.

DBRS notes that continued growth in the U.S. economy is expected to produce increased packaging demand, and containerboard/packaging industry capacity discipline should produce gradually increasing product prices. Rising prices and cost restructuring are expected to enable Smurfit-Stone to gradually increase profitability. The Company is engaged in a packaging restructuring program that is designed to reduce costs by US$600 million and increase revenues by US$650 million by the end of 2008. The resulting improvement in operating earnings includes the closure of up to 20% of its corrugated container plants and the sale of all or part of its consumer packaging businesses to fund projects to reduce costs. DBRS believes the cost reduction objective is realizable, but the Company’s inability to meet revenue and divestment objectives would likely put pressure on the rating. However, the successful completion of the operating earnings improvement program would significantly improve the Company’s credit metrics and be favourable for the rating.