DBRS Confirms Abitibi-Consolidated Inc. at BB (low), Trend Remains Negative

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of Abitibi-Consolidated Inc. and Abitibi-Consolidated Company of Canada (“Abitibi” or the “Company”) at BB (low). The trend remains Negative, reflecting the downside risk to the Company’s financial profile. DBRS does not expect the credit profile of Abitibi to materially change over the near term.

Abitibi is expected to continue to face declining newsprint consumption, high/rising energy/input costs, and the strengthening Canadian dollar, which limit material earnings upside. In the event that these pressures intensify, higher losses could result in a large free cash flow deficit, additional pressure to the Company’s balance sheet, and would likely result in a rating downgrade. DBRS notes that structural decline in newsprint demand, due to electronic substitution, declining circulation, etc., is expected to continue. However, operating rates are likely to remain at robust levels over the near term, largely due to significant newsprint industry capacity closures (led by Abitibi). The favourable supply/demand balance is expected to support modest newsprint price increases as the full impact of announced capacity closures are realized through the year. That being said, Abitibi remains highly exposed to strength in the Canadian dollar, which is expected to offset much of the impact on margins. Subsequently, earnings are expected to remain negative in 2006, but losses are likely to narrow.

DBRS expects Abitibi’s leverage to remain relatively stable over the near term, albeit at aggressive levels. Free cash flow (before working capital) is anticipated to reach roughly break-even levels, driven by lower net losses and relatively stable capex as the Company seeks to preserve capital. Abitibi’s debt maturity profile has improved and increased financial flexibility, following redemptions with proceeds from the sale of its Pan Asia Paper Co. Pte Ltd. investment. In addition, the Company has significant saleable assets in the form of hydroelectric facilities, which would provide a significant source of liquidity if required.

Note:
Abitibi-Consolidated Company of Canada’s Notes are guaranteed by Abitibi-Consolidated Inc.