DBRS Downgrades Bowater Canadian Forest Products Inc. to BB (low); Trend Remains Negative

Dominion Bond Rating Service (“DBRS”) has today downgraded the rating of Bowater Canadian Forest Products Inc. (“Bowater” or the “Company”) to BB (low) from BB. The trend remains Negative. The downgrade reflects persistent weakness in Bowater’s credit metrics and the expectation that a significant improvement will not take place over the near term. The Negative trend recognizes the considerable headwinds facing the Company.

Bowater’s operating performance has been negatively impacted by the structural decline in North American newsprint demand, by high energy and input costs (i.e., transportation, chemicals, etc.), and by the strengthening of the Canadian dollar. Newsprint is the Company’s largest business segment and accounts for more than 40% of annual revenues. Even though disciplined industry capacity curtailments are expected to support moderate newsprint price increases over the near term, the aforementioned challenges will limit a measurable rebound in profitability. DBRS notes that over the near term, modest earnings growth and low capex are expected to enable Bowater to generate neutral to modestly positive free cash flow. However, free cash flow will not be sufficient to measurably reduce debt from aggressive levels (67% debt-to-capital at year-end 2005), which increases financial risk. This risk would be increased with a slowdown in economic conditions. In the event of weaker-than-expected earnings and cash flow or a major debt-financed acquisition, further rating action may be considered.

DBRS notes that despite high debt levels, the Company’s liquidity risk is expected to be manageable. Bowater has cash and available credit of US$488 million at March 31, 2006, and the Company intends to monetize approximately US$300 million worth of timberlands. Furthermore, Bowater has no large debt repayment requirements before 2009.

Note:
Issuer Ratings apply to all general senior unsecured obligations of the issuer in question.