DBRS Confirms Domtar Ratings

DBRS has today confirmed the ratings for Domtar Corporation (Domtar or the Company) and subsidiary companies, including Domtar’s Issuer Rating of BB with a Stable trend. The ratings reflect a business risk that is higher than industry averages due to the Company’s high earnings dependency on uncoated free sheet (UFS) papers. Improvements in the UFS paper market in 2007 have been largely due to disciplined industry producers that closed sufficient capacity to bring supply in line with demand. The narrowing of the supply gap supported higher product prices and associated revenues that offset high/rising input costs (i.e., energy, chemicals, fibre, freight) and strength in the Canadian dollar, enabling Domtar to record positive earnings and cash flows. The structural decline in UFS demand from electronic media penetration, grade substitution and conservation, among other factors, is well established and remains the key issue facing the Company. DBRS expects that UFS demand will remain under pressure going forward, particularly with moderating U.S. economic growth. Industry capacity curtailments will continue to be required to provide pricing support.

Domtar, as the leading North American UFS producer, is expected to continue to take an aggressive role in supply management. Successful supply management will support price increases in the near term that should offset higher energy, chemical and transportation costs. In addition, the Company is expected to obtain at least $200 million run rate acquisition synergies by the end of 2008. Liquidity is not expected to be an issue over the near- to medium-term, given cash and unused credit facilities of $723 million and a lack of large debt maturities through 2010. Capex is expected to remain less than depreciation in 2008, a strategy that will benefit cash flow. Although free cash flow is expected to be positive, it is not forecasted to be sufficient to significantly change the corporate financial structure. As a result, the Company’s balance sheet is expected to remain relatively unchanged over the near term.

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