DBRS Changes Trend of Catalyst Paper Corporation to Stable

Dominion Bond Rating Service (DBRS) has today changed the trend of the Senior Debt of Catalyst Paper Corporation (Catalyst, or the Company) to Stable from Negative.

Despite a strong Canadian dollar and high energy and energy-related prices, successful supply management strategies have enabled pulp and paper manufacturers to implement cost-push product price increases over the past year. Fibre supply shortages and a strong supply management discipline in North American and European forest products companies is expected to continue to bring supply into line during periods of weak demand, enabling pulp and paper producers to implement cost-push price increases.

Supporting the trend change is the expectation that near-term profitability will be marginally positive as the earnings impact of cost-push price increases in pulp and groundwood specialties offsets high costs associated with increased transportation and chemical prices and a strong Canadian dollar. As a result, barring a North American or global recession, the Company’s credit metrics are forecasted to remain close to 2006 levels. Earnings and cash flow from operations have improved in the past 12 months, the result of cost savings, product mix changes and rising pulp and paper prices. Further cost savings and product mix changes are expected to add approximately $70 million to operating earnings in 2007. (Cost savings and product mix changes have improved operating earnings by more than $300 million in the 2002–2005 time period.) In addition, a high earnings leverage to groundwood specialties, pulp and newsprint will enable Catalyst to substantially increase earnings and cash flow when market conditions strengthen.

The acquisition of Pacifica Papers Inc. and a special distribution to shareholders in 2001 transformed the Company from an unlevered, cash rich firm to a levered organization. An equity issue provided funds to reduce debt in 2002, and leverage has remained close to 45% in 2002–2006. Increased leverage in 2005 was the result of a change in accounting regulation that required a 100% consolidation of a non-recourse debt.

There are no significant debt repayments in the next four years, which provides the Company with the flexibility to focus on operating cash requirements. Catalyst had cash and available credit facilities of $358 million at September 30, 2006. Hence, short-term liquidity is not a problem. Annual cash dividends were eliminated in 2002 and are not expected to be reinstated until earnings significantly improve.

Note:
All figures are in Canadian dollars unless otherwise noted.