DBRS Morningstar Changes Trends on West Fraser Timber Co. Ltd. to Stable, Confirms BBB (low) Ratings

DBRS Limited (DBRS Morningstar) changed the trends on the Issuer Rating and Unsecured Debentures rating of West Fraser Timber Co. Ltd. (West Fraser or the Company) to Stable from Positive and confirmed both ratings at BBB (low). The change in trends reflects DBRS Morningstar's expectation that the Coronavirus Disease (COVID-19) and the currently challenged forest product markets will negatively affect West Fraser in 2020, followed by a return to more normalized credit metrics in 2021. The rating confirmations reflect DBRS Morningstar’s expectation that the current challenges the Company is facing, as well as capacity curtailments, will not permanently affect West Fraser’s credit metrics and business profile. West Fraser’s investment-grade ratings continue to be supported by its ongoing commitment to maintaining a conservative financial policy, its low-cost operations, and its access to sufficient high-quality wood fibre.

In 2019, West Fraser’s profitability sharply declined as a result of the weak lumber pricing environment in North America, driven in part by a softer outlook for housing as well as difficult operating conditions in British Columbia. The Company took a number of temporary and permanent curtailment measures in order to adapt to the new market conditions. In 2019 the Company’s EBITDA (as calculated by DBRS Morningstar) declined to $133 million compared with $1,329 million in 2018, and in 2020 EBITDA is expected to be near the 2019 level, followed by a gradual recovery in 2021 to a more sustainable level. As a consequence of the current challenges, West Fraser has, currently, drawings outstanding under its revolving credit facility in order to fund a temporary cash flow deficit; DBRS Morningstar views this added debt as temporary and expects it to be repaid once cash flow surplus is generated, which is anticipated to be in the late 2020 or early 2021 time frame. DBRS Morningstar expects that West Fraser is still well positioned to manage the inherent cyclicality of its underlying business, as well as other challenges, including the softwood lumber dispute due to its footprint in Southern U.S. lumber and its low-cost profile.

While West Fraser’s financial profile is currently weak for the ratings, DBRS Morningstar views the Company’s business risk profile as mostly unchanged. Per DBRS Morningstar’s “Rating Companies in the Forest Products Industry” methodology, given that the forest products industry is among the more volatile industries, DBRS Morningstar recognizes and adjusts for these fluctuations when determining West Fraser’s financial risk assessment by taking a forward-looking, normalized view of its performance. DBRS Morningstar believes that the current softness in the lumber markets as well as the negative implications of the coronavirus outbreak will not negatively affect the Company’s financial and business risk profiles over the long term.

DBRS Morningstar may consider a negative rating action if the current weakness and negative sentiment in the lumber market, in addition to the effect of the coronavirus outbreak, were to persist much longer than currently anticipated, such that the Company’s credit metrics do not recover to levels more consistent with the current ratings in 2021. While unlikely at the moment, DBRS Morningstar may consider a positive rating action if the market environment recovers as it has in past and if the Company remains committed to a conservative financial policy, which, together, would lead to much stronger credit metrics.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Forest Products Industry (March 19, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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