Fitch Affirms Bowater at 'BB-'; Rating Outlook Stable.

CHICAGO -- Fitch Ratings has affirmed Bowater, Inc.'s (Bowater) senior unsecured bonds, bank debt and issuer default ratings at 'BB-'. Nearly $2.5 billion in debt is subject to the rating. The Rating Outlook remains Stable.

The affirmation reflects Bowater's position in the newsprint and paper industry and its leveraged financial profile. To de-leverage its capital structure, Bowater intends to sell $300 million in value of mostly timberland assets and repay debt. A combination of profit initiatives and the debt reduction should improve Bowater's financial metrics, a reasonable estimate being 4.0 times (x) EBITDA which is less than 5.4x at the end of last year. Fiber, energy and the Canadian dollar could work in concert against the company's program. However, Bowater and the rest of the industry would likely move to push through compensatory price increases in newsprint to jealously protect operating margins. This has been a struggle all along, but largely successful when mill operating rates are high.

Bowater has been making deliberate headway in realigning its businesses to adjust to a declining market for newsprint, a punishing currency appreciation in Canadian costs and increased manufacturing costs across the spectrum. By mid-year, Bowater will have converted 200,000 tons of capacity at its Calhoun, TN mill to lightweight coated and specialty papers and shuttered an expensive 210,000 tonne pulp line in Ontario. The former will move tonnage into product lines that enjoy around a 3%-4% higher EBITDA margin; the latter will take out an unprofitable manufacturing line and excess industry capacity. Plans to boost earnings and cash flow by another $80 million per year through a change-over in energy systems to biomass, additional headcount reductions and changes to distribution systems are being put into operation. Effects from these should be visible this year; more should be visible next year.

Bowater may have an upper boundary on financial improvement. The company would like to convert 250,000 tons at Thunder Bay to lightweight coated grades. The profit motive may be compelling, but the $200 million cost is difficult to digest. Bowater probably will not spend money that it has not earned. However, the returns in this business beat any interest savings from debt repayment, and so leverage is likely to be around for some time.

Bowater's major business interests are newsprint (the second largest producer in North America with 20% of capacity), lightweight coated and specialty papers (14% of North American capacity), supercalendered and uncoated mechanical grades (13% of North American capacity), market pulp (the third largest producer in North America with an 8% share) and lumber.

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