UPDATE 1-Japan's Abe cautions against Brexit regulation cliff edge
* Japanese companies are major investors in the UK (Adds quotes and detail)
Overview -- Improving housing markets combined with good demand and pricing for wood products have resulted in better-than-expected earnings for U.S. timber real estate investment trust (REIT) Potlatch Corp. -- We are revising our outlook to stable from negative and affirming all existing ratings, including our 'BB' corporate credit rating. -- The stable rating outlook reflects our expectations that improving housing and lumber markets will result in Potlatch's leverage declining to 4x over the next several quarters. Rating Action On Oct. 29, 2012, Standard & Poor's Ratings Services revised its outlook on Spokane, Wash.-based Potlatch Corp. to stable from negative. At the same time, we affirmed all existing ratings, including our 'BB' corporate credit rating on the company. Rationale The outlook revision and affirmation reflects our improved view for Potlatch's EBITDA performance in light of recovering housing markets and better than previously anticipated wood products segment earnings. As a result, we now expect Potlatch's leverage to decline to approximately 4x at year end 2012 and be maintained below 4x in 2013. The ratings on Potlatch reflect what Standard & Poor's considers to be the company's "fair" business risk as a midsize forest products company with cyclical earnings and cash flow-primarily in wood products manufacturing-and modest geographic diversity. In addition, we have revised our assessment of Potlatch's financial risk as "significant" from "aggressive" given our view that leverage over the next several quarters will decline to 4x or below. Under our baseline scenario, we expect Potlatch's 2012 EBITDA to be relatively in line with the $119 million of EBITDA generated in 2011. For 2013, we estimate EBITDA to be comparable with 2012's forecasted level. Key assumptions to our EBITDA forecast include: -- U.S. housing starts improve to 750,000 in 2012 and 950,000 in 2013; -- Annual harvest volumes remain in-line with management's guidance for about 3.5 million tons, compared with 2011's level of about 4.1 million tons; -- Favorable demand and pricing conditions for manufactured wood products continue throughout 2013; and -- A material decline in its real estate segment's sales following the disposal of most of its non-strategic timberland over the past three years (non-strategic timberland sales constituted over $30 million of sales in 2011 and $70 million of sales in 2010). A key downside risk to our near-term forecast would be weaker-than-expected pricing or demand for the company's timber and wood products if the expected recovery in housing markets were to reverse in 2013. A key upside risk is if better-than-anticipated log pricing conditions were to result in annual harvest levels returning to 4 million tons or more. Potlatch's debt (including $123 million of operating leases and pension-related adjustments) was about $470 million as of June 30, 2012. Based on our operating assumptions, we forecast debt to EBITDA could approximate 4x at the end of 2012, a level we view as consistent with the 'BB' rating given its "fair" business risk. In addition, we expect funds from operations (FFO) to debt could be in the high-teens range in 2012, compared with nearly 19% and 4x for 2011, respectively. For 2013, we anticipate credit metrics approximating 2012's forecasted levels. Potlatch is a U.S. timber REIT that owns and manages approximately 1.43 million acres of timberlands in Arkansas, Idaho, and Minnesota. It is our view that the carrying value of these timberlands (about $651 per acre) materially understates the economic value of these holdings. For example, Potlatch's debt-to-capital is 76% on a book value basis. However, debt-to-capital is closer to 18% if we adjust these holdings closer to market value using an estimated market value of approximately $1,720 per acre. We derived this estimated value using a range of recent timberland transactions as reported by publicly traded timber REITs and the appraised value of Potlatch's Idaho timberlands pledged to secure its bank credit facility. The values per acre ranged from about $2,000 per acre in Idaho to $750 per acre in the Lake States to $1,550 per acre in the U.S. South. This analysis did not ascribe additional value to the 220,000 to 250,000 acres of property held for higher or better uses other than timberlands. In addition to its timberlands operations, Potlach also conducts a land sales and development business and operates wood products manufacturing facilities through its taxable REIT subsidiary. While the company's end markets are cyclical, the degree of cyclicality varies, as log prices generally are more stable than lumber due to its more diversified end markets. The company is committed to expanding its land holdings where it currently has a geographic footprint and regional expertise (Idaho and the central South). However, our rating and outlook do not incorporate significant debt-financed timberland acquisitions in the next several quarters given the current market environment. Liquidity Our assessment of Potlatch's "adequate" liquidity is based on the following: -- We expect that sources of liquidity (including cash, forecasted funds from operations, and availability on its revolving credit facility) over the next year will exceed its uses by 1.2x or more. -- We expect that net sources would be positive even with a 15% drop in EBITDA. -- Covenant compliance would also survive a 15% drop in EBITDA. Potlatch's credit agreement requires a funded indebtedness to capitalization ratio of 70% or less, collateral coverage of 3x or more, a minimum interest coverage ratio of 2x, and a minimum liquidity requirement of $60 million. As of Sept. 30, 2012, the company's sources of liquidity included cash and short-term investments of approximately $62 million and an undrawn $150 million revolving credit facility due Dec. 8, 2013. Our ratings assume cash balances and FFO will be used for near-term debt retirement, including $8 million of maturities in 2013, annual capital expenditures requirements of about $15 million, and supporting the approximately $50 million annual dividend. Based on our EBITDA forecast, we expect the company to generate free cash flow in excess of its dividend in 2012 and 2013. We expect the company to address the 2013 maturity of its revolving credit facility in a timely manner and that any future acquisitions or share repurchases would not constrain the company's liquidity position. Recovery analysis The company's senior secured debentures are rated 'BBB-' with a '1' recovery rating, indicating our expectation for very high (90% to 100%) recovery in the event of a payment default. The company's senior unsecured notes are rated 'BB' with a '3' recovery rating, indicating our expectation for meaningful (50% to 70%) recovery in the event of a payment default. For the complete recovery analysis, please see our recovery report on Potlatch published shortly after this report, on RatingsDirect. Outlook The stable rating outlook reflects our expectations that improving housing and lumber markets will result in Potlatch's leverage declining to 4x over the next several quarters. In addition, we expect the company to maintain its adequate liquidity position and address the 2013 revolver maturity in a timely manner. We could lower the rating if a housing recovery stalls resulting in financial measures more indicative of an aggressive financial risk profile, or if the company's financial policy becomes more aggressive with regard to dividends, share repurchases, or debt-financed timberland purchases. Specifically, we would view leverage approaching 5x and FFO to debt in the low teens area on a sustained basis as consistent with a lower rating. An upgrade could occur if a continued improvement in log and lumber markets results in the company sustaining EBITDA approximately 20% above our projected 2013 level such that FFO to debt increases to 25% and debt to EBITDA declines to the mid-3x area. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Criteria For Rating The Forest Products Industry, Dec. 11, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Outlook Action To From Potlatch Corp. Corporate Credit Rating BB/Stable BB/Negative Ratings Affirmed Potlatch Corp. Senior Secured BBB- Recovery Rating 1 Senior Unsecured BB Recovery Rating 3
* Japanese companies are major investors in the UK (Adds quotes and detail)
LONDON, April 29 Japanese Prime Minister Shinzo Abe said that if the United Kingdom left the European Union with an abrupt change of rules for businesses then it could cause confusion for international firms.