DBRS Confirms TimberWest Forest at BBB (high)

DBRS has today confirmed the Senior Unsecured Debentures rating of TimberWest Forest Corp. (TWF or the Company) at BBB (high) with a Stable trend. The confirmation reflects TWF’s low financial and business risk, which will enable the Company to endure a short period of weak market conditions and poor financial performance.

The North American building products sector is close to the bottom of the cycle, but a meaningful improvement is unlikely to occur until 2009. In the interim, ongoing weakness in the U.S. housing market, oversupply conditions in the Japanese market and sawmill curtailments in western Canada and the U.S. Pacific northwest are expected to reduce log demand in the next 12 months. As a result, TWF’s log production and associated log sales are forecast to decline below 2007 levels.

Total revenues and earnings are expected to drop and the Company does not expect to generate sufficient distributable cash in 2008 to cover its distribution obligations. Negative free cash flow would be financed by credit facilities, negatively affecting leverage and credit metrics in the near term. However, despite the pessimistic near-term outlook, TWF is well positioned to weather a period of weak market conditions. The balance sheet is modestly leveraged (debt imbedded in the stapled units is considered to be equity). The Company could take on additional debt to cover the expected free cash flow deficit and leverage would still be acceptable for the rating.

TWF also had cash and unused credit facilities of $137 million at December 31, 2007, which is more than sufficient to fund near-term cash requirements. Annual capex is expected to be less than $5 million, a factor that will have a positive impact on free cash flow. In addition, the Company has the option of deferring cash distributions or paying the distributions in the form of equity, which provides additional financial flexibility.

While the collapse of the U.S. housing market has brought timber and lumber prices to trough levels in the past six months, the medium- to longer-term outlook is optimistic. Significant reductions in global log availability should lead to increased sawlog prices in future years. The implementation of Russian log export taxes in 2007, with rates rapidly escalating through 2009, are expected to significantly reduce Russian log exports to Japan and other Asian countries. In addition, ongoing log supply restrictions in Ontario and Québec and anticipated harvest curtailments as a result of the mountain pine beetle epidemic in the interior of British Columbia will also tighten log demand-supply ratios. Demand could outstrip supply as the peak of the next building products cycle approaches, producing record high prices for sawlogs. TWF has the potential to significantly increase earnings and cash flows in the next housing market upturn.

TWF owns 796,000 acres of forest lands that have an estimated market value of US$1.2 billion. A portion of the forest lands has been classified as higher and better use (HBU) properties, with a market value in excess of $300 million. Real estate markets on Vancouver Island remain strong and TWF’s recognized HBU lands are expected to benefit from the region’s high desirability, limited land availability and changing demographics in future years, augmenting cash flows.

The Company has reclassified its HBU land portfolio into “core” and “non-core” lands. Core lands (80,000 acres) require further development, including planning and zoning changes to maximize market value. Non-core lands (54,000 acres) have reached maximum value and will be sold “as is” in the near term (HBU land sales in 2008 are expected to be in the range of $20million to $40 million). Timberlands and HBU properties are easily saleable, and the Company’s asset value to debt coverage ratio of 6.0 times provides a high level of liquidity and a financial risk that is substantially less than forest products industry averages.

Despite the optimistic medium-term outlook, there is a risk that cost increases, industry demand-supply ratios and exchange rates may not conform to expectations in the near term and earnings and cash flows could worsen more than expected. A significant deterioration in earnings and cash flows could lead to negative rating actions. In addition, TWF is currently in the process of negotiating changes to its debt covenants to ensure the Company remains in compliance through the anticipated difficult market conditions in 2008. The Company is also negotiating the renewal of its Tranche B credit facility, which matures in September 2008. DBRS expects these negotiations will be successfully concluded before the end of Q3 2008. Failure to resolve either the credit facility or compliance issues could also lead to negative rating actions.

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