DBRS Upgrades Norbord Inc. to BB, Trends Now Stable

DBRS has today upgraded the Issuer Rating of Norbord Inc. (Norbord or the Company) to BB from BB (low) and has changed the trend to Stable from Positive. The upgrade reflects the fact that Norbord’s credit metrics have strengthened significantly, driven by improved market conditions and better operating efficiency, and the expectation that Norbord will maintain solid credit metrics going forward.

DBRS has also confirmed the recovery ratings of Norbord’s Senior Secured Notes and Senior Unsecured Notes at RR3 and RR6, respectively. As a result of the base Issuer Rating being upgraded to BB, with a Stable trend, the RR3 on the Senior Secured Notes corresponds to a confirmation of the Senior Secured Notes at BB, with a Stable trend, which also removes them from Under Review with Developing Implications, where they were placed on May 27, 2013. In addition, the RR6 on the Senior Unsecured Notes corresponds to an upgrade of the Senior Unsecured Notes to B (high) from B, with a trend change to Stable from Positive.

DBRS changed the trend on Norbord’s Issuer Rating to Positive from Stable earlier this year, noting that if the Company’s credit metrics remained solid in the near term, its Issuer Rating would likely be upgraded by one notch. Since then, Norbord’s credit metrics have remained solid and significantly stronger than the previous year, driven by the improved U.S. housing industry and better operating efficiency achieved through continued mill improvements. Recent weakening in North American oriented strand board (OSB) prices was caused by: (1) industry mill restarts and (2) record high OSB prices, which caused the reverse substitution to plywood and the redirection of export volumes into the domestic market. Currently, North American OSB prices have stabilized, and they are expected to remain near current levels throughout the remainder of 2013 as this is the time of year when producers begin performing annual maintenance. Going forward, DBRS expects Norbord’s 2014 credit metrics to remain solid due to sustained recovery in the U.S. housing market and the expected positive effects from recent industry consolidation where the top four producers will account for 75% of industry capacity. Moreover, positive sentiment in the U.K. housing market, supported by improved housing prices and government stimulus, bodes well for Norbord’s European operations. However, DBRS expects 2014 credit metrics to be weaker than 2013 due to lower OSB prices driven by the added industry production from restarted mills. In the near-to-medium term, Norbord is well positioned to benefit from a full recovery of the U.S. housing market, supported by the suppressed household formations and improving labour market. DBRS maintains its expectation that 2013 housing starts will reach near one million units.

Despite having gone through one of the industry’s worst historical downturns, Norbord managed to materially reduce its debt level during that time by reducing its total debt obligations from $610 million in 2008 to $434 million in June 2013, which greatly reduced its financial risk.

Norbord’s credit rating continues to be supported by its solid business profile as a leading low-cost producer of OSB in North America, driven by continued advancement in operating efficiencies and the implied support of Brookfield Asset Management Inc. (BAM, rated A (low) by DBRS), its majority owner. In addition, Norbord is expected to maintain its leading and low-cost producer status with continuing capital investment programs.

In conclusion, DBRS expects the U.S. housing market to continue its recovery and the Company’s credit metrics to remain solid for the foreseeable future, while improvements in operating efficiency, a more consolidated industry and reduction in leverage make Norbord better positioned to enter the next downturn.

DBRS has simulated a default scenario for Norbord in order to analyze the potential recovery of the Company’s senior debt in the event of default. The scenario assumes a prolonged period of severe economic conditions, regardless of how hypothetical or unlikely the conditions may be, in which product demand and prices plummet. Based on the recovery analysis, DBRS believes that holders of the Senior Secured Notes would recover approximately 60% to 80% of the principal; therefore, the recovery rating remains at RR3. The Senior Unsecured Notes would recover 0% of the principal; therefore, the recovery rating remains at RR6.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Forest Products Industry (June 2013) and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers (January 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.