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Fitch Downgrades Abitibi Consolidated and Bowater; Outlook Remains Negative.

CHICAGO -- Fitch Ratings has downgraded the ratings of Abitibi Consolidated Inc. (ABY) and Bowater Inc. (BOW) and assigned new ratings to the debt of Bowater Canadian Forest Products Inc. (BCFP). The Rating Outlook for both companies remains Negative.

Fitch downgrades the following:


--Issuer Default Rating (IDR) to 'B-' from 'B+';

--Senior unsecured debt to 'B-/RR4' from 'B+/RR4';

--Secured revolver to 'B/RR3' from 'BB-/RR3'.


--Issuer Default Rating (IDR) to 'B-' from 'BB-';

--Senior unsecured debt to 'B-/RR4' from 'BB-';

--Secured revolver to 'BB-/RR1' from 'BB'.

Fitch rates the following:


--Issuer Default Rating (IDR) 'B-';

--Senior unsecured debt 'B+/RR2';

--Secured revolver 'BB-/RR1'.

The downgrades of the IDRs of ABY and BOW homogenize the ratings of the two companies, giving effect to the probable consummation of their merger which now awaits only the approval of the U.S. Department of Justice. The downgrades and Negative Outlook also address the adverse conditions in the newsprint and lumber markets, which are likely to continue and are compounded by the depreciation in the value of the U.S. dollar and costly softwood lumber duties. The high-brite and specialty papers made by both companies and the coated papers and pulp sold by BOW may be the only profitable businesses of the two this year, before special items.

ABY and BOW both reported losses from newsprint operations before special items in the second quarter, reflections of an added weakness in pricing since the first quarter. The pressure on newsprint prices is not likely to abate soon, the product of too much supply chasing a falling North American demand that cannot be counterbalanced by a budding export market alone. The fall in the consumption of newsprint continues to lead production curtailments at mills, a situation that does not instill confidence in the probability of near-term price stability, let alone improvement. In addition, costs are not soon to be forgiving as long as export pulp markets are robust and chip supplies from sawmills are tight due to the weakness in residential housing.

ABY and BOW are also contending with depressed lumber prices, high log costs and export duties to the United States, all of which have made their sawmill operations unprofitable. Chances for a quick turnaround in the lumber business have been dimmed by the approaching parity of the Canadian dollar with the U.S. dollar.

BOW has been financing its operating losses and necessary capital with asset sales. ABY has been selling assets and borrowing money. Both companies have ample liquidity. ABY has around CAD400 million available under its secured revolver. BOW has most of its secured US$415 million domestic revolver available, apart from letter of credit usage. The same is true of BCFP's CAD165 million secured revolver. Likely all will be replaced or restructured following the consummation of the merger and the probable combination of some downstream subsidiaries which could affect ratings.

Both BOW's and BCFP's current secured revolvers contain borrowing base limits of availability, the rationale for their high recovery rating ('RR1'). The recovery rating of BCFP's senior unsecured notes and bonds, which are not guaranteed by BOW, is a reflection of the company's low leverage relative to its asset base and the debt's potentially high recovery in liquidation.

Fitch believes the merger of ABY and BOW is beneficial to both companies, the industry at large, and provides an opportunity to align operating capacity for newsprint with order of book demand while streamlining costs in lumber production. The realization of cost efficiencies in these operations could lag more softness in the markets. Further operating losses with the costs of rationalization could result in a challenging leverage, which is factored into the ratings and Outlook.

ABY and BOW combined produce around 5.7 million metric tonnes of newsprint per year as well as supercalendered and specialty papers, light-weight coated papers and pulp from 32 pulp and paper mills, and lumber and other wood products from some 35 facilities. Combined pro forma revenues from ABY and BOW last year totaled US$7.7 billion.

Fitch's Recovery Ratings (RR) are a relative indicator of creditor recovery prospects on a given obligation within an issuers' capital structure in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors can be found at

Fitch's rating definitions and terms of use of such ratings are available on the agency's public web site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Publication:Business Wire
Date:Aug 1, 2007
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