US CREDIT-Temple-Inland debt may have room to rally

By Karen Brettell

NEW YORK, Feb 27 (Reuters) - Temple-Inland Inc.'s (TIN.N) spreads tightened on Tuesday after the company announced plans to separate into three stand-alone companies and sell its timberland assets and, depending on how the remaining business is structured, its debt may have room for further improvement.

The U.S. forest products company, which has been under pressure from activist investor Carl Icahn, said on Monday the spinoffs would include its financial services operations in Guaranty Bank and more than 236,000 acres of real estate operations. For details, see [ID:nN26288625].

The plan would leave Temple-Inland with its corrugated packaging and building products businesses.

After rising on the news, the cost to insure the company's debt fell by around 3 basis points to about 62 basis points, or $62,000 per year for five years to insure $10 million in debt.

When management gives more information about what the capital structure will be and when there is a better sense of what the proceeds of the sale will be, there will be more clarity on how the restructuring will affect Temple-Inland's debt, said analyst Sam Goodyear at New York-based CreditSights.

"There is a clear incentive to maintain a strong balance sheet," Goodyear said. The corrugated packaging and building products industries are in consolidation mode and Temple-Inland may be likely to enter into a merger or acquisition with either Smurfit-Stone Container Corp. SSCC.O or Weyerhaeuser Co. (WY.N).

This process would be aided by a strong balance sheet, Goodyear said.

Temple-Inland said the majority of the proceeds from the sale would be returned to shareholders, though it is also committed to maintaining an "appropriate capital structure" for the business to endure financial flexibility, and also said it planned to reduce debt.

Both Moody's Investors Service and Standard & Poor's said they may cut Temple-Inland's debt into junk territory on the restructuring. Moody's rates the company "Baa3," the lowest investment grade rating, and S&P rates the company "BBB," the second lowest investment grade.

"We expect the break-up of the company to yield a sufficient premium to the current enterprise value to allow management to return significant value to shareholders in the form of dividends and share repurchases while also making the cash payments necessary to maintain investment grade ratings," Goodyear said.

The company has strong earnings before interest, taxes, depreciation and amortization (EBITDA) relative to its debt, even before any debt reduction, Goodyear said. In addition, the company has said it plans to negotiate fiber supply agreements, which will held reduce some of the losses in EBITDA from the sale of the timberlands, he said.

"With 5-year CDS at 62 (basis points) we think there is still decent value there," Goodyear said. Goodyear recommends selling protection on Temple-Inland and buying protection on Weyerhaeuser, which may still face event risk and is trading tighter at around 39 basis points.

Bear Stearns analyst Ted Izatt, however, disagrees the company is likely to strive to retain its investment grade ratings, and said the company's definition of "flexibility" could include its debt being rated "BB" or lower.

"Since the term 'financial flexibility' can be defined in many different ways, we believe investors should assume that there will be no material debt reduction until such time as the management states otherwise," Izatt wrote in a report.

"We also note that management repeatedly made it clear that its goal is to maximize shareholder value," Izatt said. "Until we get further guidance from the company, we do not see any credit upside in TIN and believe there could be a lot of downside depending on how the restructuring proceeds."