DBRS Confirms Ratings of AbitibiBowater Inc. Subsidiaries

DBRS has today confirmed the ratings of the subsidiary companies of AbitibiBowater Inc. (ABH or the Company), including Abitibi Consolidated Inc.’s (ACI) Issuer Rating of B. The trend on all ratings remains Negative reflecting the possibility of increased business risk resulting from a slowing U.S. economy, continued strength in the Canadian dollar and the chance that supply management may not produce sufficiently high newsprint prices to materially change ABH’s credit profile. There is a significant risk that cost increases, industry demand/supply relationships and exchange rates may not conform to expectations, and earnings and cash flows could worsen. Moreover, the structural decline in North American newsprint consumption will require further production curtailments to support a long-term upward trend in product prices. Failure to keep supply close to demand will trigger another downward trend in prices. In addition, the companies face the additional risks of potential labour disruptions in the Company’s Canadian mills, higher than expected cost increases associated with energy and energy related cost inputs, as well as refinancing challenges in 2009. A lack of progress in strengthening the Company’s credit metrics could lead to negative rating actions.

The ratings are supported by the strong position held by ABH in the North American newsprint market where the Company owns 43% of the installed newsprint production capacity. ABH has been effective in implementing price increases in the past six months. U.S. benchmark newsprint prices have increased from $570/tonne in November 2007 to $640/tonne in March 2008 and another $60/tonne increase has been announced for Q2 2008. ABH has publicly committed to manage supply going forward and success in achieving higher newsprint prices through supply management should lead to an improvement in earnings and cash flow in 2008 and 2009. 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 from 2003 to 2006.

The upward trend in pulp and coated and uncoated groundwood paper prices is also expected to continue through 2008. DBRS assumes that while the strength in the Canadian dollar over the near term will remain onerous, it is expected to be manageable near current levels. The near-term profitability outlook for ABH is positive as the benefits of pulp and paper price increases and stable, albeit low, lumber demand and prices (DBRS expects lumber demand and prices are close to trough levels for this cycle) outweigh the negative influence of energy and energy related price increases and a strong Canadian dollar. In addition, the Company expects synergistic cost savings to increase annualized operating earnings by $375 million by the end of 2009. Free cash flow is expected to recover as earnings increase and capex and dividends are reduced. ABH has suspended the dividend previously paid by Bowater Inc., a tactic that will positively impact future cash flows by about $50 million. Capex in 2008 is expected to be less than $200 million, well below forecasted depreciation of $650 million, a strategy that will positively impact cash generation. Planned asset sales, including timberlands and the recently completed divestiture of the Snowflake Arizona newsprint mill (required for U.S. regulatory approval of the AbitibiBowater merger), could generate roughly $500 million in after-tax cash proceeds that is expected to be applied to debt reduction. ABH is planning to reduce total debt by $1 billion in the 2008 to 2010 time period from currently aggressive levels. Although the 2008 refinancing provides sufficient liquidity to fund short-term cash requirements, the Company faces substantial debt maturities in 2010 and 2011. Further proceeds from divestitures and a significant recovery in earnings and cash flows will be required to repay $2.4 billion of maturities.

DBRS has also confirmed ratings of BB with a Negative trend to the new Senior Secured Notes (Notes) and Senior Secured Term Loan (Term Loan) issued by Abitibi-Consolidated Company of Canada (ACCC). The Notes will be secured by fixed assets that include 12 pulp/paper mills as well as ACI’s equity interest in hydroelectric facilities. The Term Loan will be secured by the working capital of ACCC as well as the assets of ACI’s Alabama River paper mill. The three-notch differential above the Issuer Rating primarily reflects virtually full recovery afforded to holders of the secured debt noted above in the event of default, based on DBRS’s recovery analysis. DBRS notes that the Senior Unsecured Debt of ACI, ACCC, Bowater Inc. (BI) and Bowater Canadian Forest Products Inc. (BCFP) is rated the same as the Issuer Ratings of ACI and BI, which reflects an average level of recovery after redemption of secured debt in a highly-stressed scenario.

DBRS has also assigned a new Issuer Rating of B (low) with a Negative trend to AbitibiBowater Inc. The one notch rating differential between the parent and subsidiary companies reflects the fact that debt of the parent company, in the absence of a guarantee, will be subordinate to the debt of the subsidiary companies.

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