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Moody's lifts Tembec Industries to SGL-3
Moody's Investors Service said it upgraded the speculative grade liquidity rating of Tembec Inc.'s key operating subsidiary, Tembec Industries, Inc., to SGL-3, indicating adequate liquidity, from SGL-4, indicating poor liquidity, and affirmed the company's Caa3 corporate family and Ca long-term debt ratings.
The outlook remains stable.
The upgrade follows the receipt of $242 million in softwood lumber duties, which the agency said provides a boost to liquidity and ensures that there will be more than ample cash available to fund interest payments over the next 12 to 18 months, despite the expectation that the company will remain free cash flow negative. Additionally, Tembec's recently refinanced credit facilities, available to itself and its wholly owned subsidiary, Tembec Enterprises Inc. (formerly Spruce Falls Inc.), provides further liquidity.
Moody's said that while Tembec Industries' duty refund is sizable and will ensure that the company can continue to operate despite the weak financial performance, it does not change the company's credit profile as it will not allow the company to meaningfully improve its cost competitiveness relative to other producers.
Although the company has made some progress in improving its cost structure since it announced a "recovery plan" in early 2006, it has been unable to consistently generate positive free cash flow. The agency said it believes that Tembec Industries will fund its operating cash deficit by using its cash and the availability under its credit facilities, which reduces the likelihood that bondholders' potential recovery will increase as a result of the duty refund.
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