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
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
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.