Chicago, Illinois, USA, 01 September 2010 -- (BUSINESS WIRE) -- Fitch Ratings has affirmed the "BB+" issuer default rating (IDR) and the "BB+" senior unsecured debt rating of Weyerhaeuser Company. The rating outlook remains negative.
The ratings are based on Weyerhaeuser's earnings prospects and its adjusted leverage combined with the cash generation capability of the company. Weyerhaeuser continues to be troubled by a profitless Wood Products business and a depressed homebuilding (Real Estate) business. Both are directly affected by the malaise in residential construction and the repair and remodeling markets which refuse to show much economic recovery. Weyerhaeuser's Timberlands and Cellulose Fibers businesses continue to turn a profit, although Timberlands is operating at depressed levels due to poor demand for lumber and panels while Cellulose Fibers has been on the rise owing to supply constraints in the pulp markets amid better demand.
Combined Weyerhaeuser has rebounded strongly in year-over-year half-year comparisons, earning a little over USD 400 million in EBITDA in the first six months of 2010. However, the back half of the year will struggle to match the strength of the first half what with falling lumber and panel prices and retreating home sales and housing starts being the harbingers of a poorer second half. Fitch expects that Weyerhaeuser will still emerge from 2010 with better leverage metrics than the company was showing at the half-way mark (5.4 times [x] net debt/EBITDA). However, the result will still be well out of "investment grade" territory.
Coinciding with an expected softness in results is Weyerhaeuser's conversion to a real estate investment trust (REIT). This will benefit shareholders through the elimination of the double taxation of eligible REIT income repatriated as dividends. The immediate cash cost of the conversion to the company is a USD 560 million dividend just paid, which lowers cash balances of some USD 1.8 billion at the end of last June. To be revealed in the fourth quarter is a new dividend payout, likely leaning toward maximizing a distribution of REIT earnings. In the initial occurrence of these events, Weyerhaeuser will probably be free cash flow negative (cash flow from operations less capital expenditures and dividends), and although business conditions are expected to improve in 2011, the prognosis for free cash flow is less certain and the basis for the Negative Ratings Outlook.
In Fitch's view, Weyerhaeuser does have options. Within its portfolio of timberlands is 600,000 acres of nonstrategic lands that are available for sale, as well as other assets. Fitch estimates that the nonstrategic acreage could be worth around USD 1.2 billion, which Weyerhaeuser could use to restore liquidity, repay debt, buy back stock, or some combination thereof. Such actions could affect the company's debt ratings; however, the timing, composition, ability, and desire are yet to be seen.
Scheduled debt repayments for the balance of this year and 2011 are nominal, increasing to USD 700 million-plus in 2012. Weyerhaeuser also has a USD 1 billion undrawn revolver at its disposal which matures in 2012.
Ratings drivers continue to center on the cash flow of Weyerhaeuser's Wood Products' operations, and the ability of Weyerhaeuser's non-REIT subsidiaries (essentially Wood Products, Real Estate, and Cellulose Fibers) to be self-sustaining. Weyerhaeuser's upcoming dividend program in relation to its cash flows is a principal determinant.