TEXT-Fitch affirms Weyerhaeuser 'BB+' ratings

Thu Aug 23, 2012 10:40am EDT

Aug 23 - Fitch Ratings has affirmed the 'BB+' Issuer Default Rating (IDR) and the 'BB+' senior unsecured debt ratings of Weyerhaeuser Company (NYSE: WY, Weyerhaeuser). The Rating Outlook is Stable. The ratings are based on the prospective earnings of Weyerhaeuser's business portfolio, free cash flow and the company's liquidity profile which includes its non-core timberlands. A depressed homebuilding market continues to haunt Weyerhaeuser's earnings, but a dramatic improvement in the fortunes of Wood Products, Weyerhaeuser's business unit responsible for the production of lumber, oriented strand board (OSB) and engineered wood, are masked by consolidated year-to-date results which are slightly lower than last year. Both prices and volumes for lumber and OSB are outpacing last year, and this business unit turned a small profit for the first six months of 2012, versus an $86 million loss for the period in 2011. At Weyerhaeuser Real Estate Company (WRECO), Weyerhaeuser's home building unit, backlogs and buyer traffic are up while cancellation rates are stable, but margins and sales prices are somewhat lower due to mix. Year-over-year results for the parent timberland REIT were on an approximate par with last year excluding earnings from non-strategic and higher and better use timberland sales. Domestic log prices were lower in both the West and South, but harvest levels were higher in both. Weyerhaeuser's Cellulose Fibers business is 53% behind last year in operating earnings, primarily owing to weaker pricing than the lofty pulp prices seen last year. Free cash flow through the first six months of this year is a negative $94 million after $161 million in earnings distributions. Fitch projects free cash flow will turn positive by the end of the year, however, approaching $200 million, assuming no increase in the dividend and owing to lower working capital and better results at both WRECO and Wood Products. Net debt/EBITDA at the end of 2012 is expected to fall to 3.5 times (x), down from 4.1x at the end of 2011 and 3.9x LTM EBITDA at June 30, 2012. Cash balances have been falling steadily at Weyerhaeuser as the company has been using cash and asset sales proceeds to support debt payments and the dividend. At June 30, 2012, the company had $861 million in cash (down from $953 million at Dec. 31, 2011) but with only around $180 million of debt coming due before the end of this year and just over $400 million maturing in 2013. Negligible sums of debt mature between 2014 and 2016. As a liquidity backstop, Weyerhaeuser has available an undrawn $1 billion revolver which it shares with WRECO and which matures in 2015. Financial covenants in the revolver include minimum net worth tests and maximum debt/total capital ratios for both companies. Weyerhaeuser and WRECO were comfortably in compliance with these tests at the close of the second quarter. Weyerhaeuser also owns non-strategic timberlands, last reported at 480,000 acres, which could be sold. A reasonable estimate of their value could approach upwards of $1 billion. Weyerhaeuser has a large unfunded pension obligation ($1.1 billion) and an aggressive investment strategy for its pension assets, 87% of which were invested in private equity and hedge funds as of Dec. 31, 2011. The plan was roughly 81% funded at the end of 2011. The unfunded pension obligation is a rating concern and could in isolation become an issue were the funded portion of the plan to fall to 70%. WHAT COULD TRIGGER A RATING ACTION? Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --Net debt/EBITDA falls below 3.0x and is sustained; --Free cash flow (after dividends) remains positive, in concert with an improved earnings profile. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --Funded portion of the pension plan falls to 70% with the likelihood that total debt will have to increase.

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