DBRS Maintains Bowater Canadian Forest Products Inc. and Bowater Inc. Under Review with Positive Implications in Expectation of a Merger with Abitibi Inc.

DBRS has today announced it will maintain the rating of the Senior Debentures of Bowater Canadian Forest Products Inc. (Bowater or the Company) and the Issuer Rating of Bowater Inc. at Under Review with Positive Implications in expectation of a merger with Abitibi Inc.

On January 29, 2007, Abitibi and Bowater agreed to merge to form a new company, AbitibiBowater Inc. (AbitibiBowater), which would be the largest newsprint producer in the world with a significant market share in North America. DBRS views the transaction, which is expected to close in Q3 2007, as positive for Bowater and Abitibi.

The “Under Review with Positive Implications” status reflects the expectation that the transaction will be completed on time, as well as the uncertainty regarding the financial and operational structure of the new company. If the transaction closes in Q3 2007 with a financial structure that is not substantially dissimilar from the proforma estimates, the likely rating action would be a confirmation of BB (low) with a newly assigned Stable trend. The confirmation and trend change would reflect the increased scale of a new company with an improved business risk compared with Bowater and Abitibi on a standalone basis.

The industry is expected to reverse the recent decline in newsprint prices and restore the upward momentum by cutting production and thereby closing the demand/supply gap. The creation of AbitibiBowater would provide a broad base of assets that would better respond to industry dynamics. However, the financial risk profile of AbitibiBowater is expected to remain relatively high, and a significant reduction in debt and a commensurate improvement in interest and cash flow coverage ratios would be required to upgrade the rating, an event unlikely to occur in the near term.

Planned asset sales, including the previously announced sale of timberland and hydroelectric generation facilities, would provide funds that will be used to reduce debt in 2007 and moderately improve AbitibiBowater’s financial profile. Expected acquisition synergies of $250 million annually will increase earnings and cash flow in two year’s time. Moreover, combined available borrowings on credit facilities totalled $900 million at December 30, 2006, which will be more than sufficient to fund capital requirements in the near term.

DBRS will continue to monitor developments with respect to the transaction along with prevailing market conditions and will determine the appropriate rating action prior to the closing of the transaction. In the event that the transaction is delayed or does not close, there would be negative implications for the rating.

Note:
All figures are in U.S. dollars, unless otherwise noted.