DBRS Changes Catalyst Paper Corporation Trend to Negative

DBRS has today confirmed the BB rating of Catalyst Paper Corporation’s (Catalyst or the Company) Senior Debt, but has changed the trend to Negative from Stable. DBRS has also removed the Company from Under Review with Negative Implications, where it was placed on November 5, 2007. The change to a Negative trend reflects continuing deterioration of Catalyst’s financial position, which is weak for the current rating. A sharp appreciation of the Canadian dollar since the summer and continued decline in North American newsprint demand are the two key challenges confronting Catalyst.

Over the past month, external financial pressures have eased somewhat as the exponential increase in the Canadian/U.S. dollar exchange rate was halted and announced newsprint capacity closures (representing approximately 5% of North American capacity) have stemmed the recent decline in newsprint prices. An improved newsprint demand/supply ratio is expected to enable newsprint producers to reinstate the upward trend of cost-push newsprint price increases that prevailed in 2003-2006. The upward trend in pulp and coated and uncoated mechanical paper prices is also expected to continue through 2008. In addition, the Canadian/U.S. dollar exchange rate has retreated from the peak levels of close to $1.10 seen in November 2007, and DBRS expects the exchange rate to remain close to par for the foreseeable future.

The near-term profitability outlook is moderately positive as the benefits of pulp and paper price increases and the absence of labour disruptions outweigh the negative influence of energy and energy-related price increases and a Canadian dollar at par with the U.S. currency. Capex is expected to be approximately $35 million in 2008, substantially below depreciation – a strategy that will positively impact cash generation. The Company is committed to stemming cash outflows by curtailing production when operating costs fall below break-even levels, a strategy that will conserve cash until market conditions rebound.

Catalyst’s financial profile is expected to stabilize close to 2007 levels in the near term. As a result, the Company is well positioned to weather an extended period of weak market conditions. There are no significant debt repayments in the next three years, which provides the Company with the flexibility to focus on operating cash requirements. Catalyst had cash and available credit facilities of $239 million at September 30, 2007. Hence, short-term liquidity is not a problem. However, despite the positive developments in newsprint supply, markets remain weak and continuing declines in North American newsprint demand will require further production curtailments to support a long-term upward trend in cost-push prices. Failure to keep supply close to demand will trigger another downward trend in prices. Moreover, there is a significant risk that cost increases, industry demand/supply ratios and exchange rates may not conform to expectations, and earnings and cash flows could worsen. A lack of progress made in stabilizing operating performance could lead to negative rating actions.

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