Moody's Cuts Potlatch's (PCH) Unsecured Ratings to 'Ba1'; Corp. Rating Assigned

Moody's Investors Service, downgraded Potlatch Corporation's (Nasdaq: PCH) senior unsecured debt ratings to Ba1 from Baa3. At the same time, Moody's assigned a Ba1 corporate family rating, Ba1-PD probability of default rating and an SGL-1 speculative grade liquidity rating. The outlook is stable.

"The downgrade reflects the company's high leverage and our expectation that breakeven free cash flow over the next several years will limit Potlatch's ability to reduce it," said Ed Sustar, Moody's Senior Vice President. "In particular, over-supplied lumber markets will continue to dampen the company's financial performance", added Sustar.

Downgrades:

..Issuer: Potlatch Corporation

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Ba1 from (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba1(LGD4) from Baa3

Assignments:

..Issuer: Potlatch Corporation

.... Probability of Default Rating, Assigned Ba1-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-1

.... Corporate Family Rating, Assigned Ba1

Outlook Actions:

..Issuer: Potlatch Corporation

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

Potlatch's Ba1 corporate family rating incorporates two notches of lift for the company's strong timber asset coverage (timberland estimated value to adjusted debt of 2.3x), while its baseline rating reflects strong liquidity but high leverage (over 5x over the next 12 months), limited scale and diversity and breakeven expected free cash flow generation given its REIT structure. Potlatch is also exposed to the volatility of the lumber market, in which much of the sidelined supply is often restarted faster than demand growth.

Potlatch has strong liquidity (SGL-1), with $8 million of cash, almost full availability (as of March 2016) under its $250 million committed bank line that matures in February 2020, breakeven free cash flow and no debt maturities over the next 12 months. Proceeds generated from the recent Central Idaho timberland sale (approximately $121 million, including a $10 million tax refund), will be primarily used to repay debt and buy back shares. We expect Potlatch will remain in compliance with its covenants over the near term. Potlatch's unencumbered asset base (most notably its timberland holdings), can be used to augment liquidity.

The stable outlook reflects Moody's expectation that operating and financial performance will improve, albeit slowly, as US housing starts improve over the next 2-3 years to normalized levels. The company's leverage metrics are weak, but Moody's anticipates gradual longer term improvements as log and lumber demand returns to more normal levels.

The rating could be downgraded if market conditions deteriorate such that timberland values decline significantly (timberland asset value/debt coverage below 2x), or if the company's adjusted debt to re-occuring EBITDA is sustained above 5x. In addition, Moody's would view material asset encumbrances or significant asset sales as a negative. An upgrade could result with growth in Potlatch's size and diversity of its timber base. Potlatch would also need to maintain timberland asset value/debt coverage above 2x, and leverage (debt to re-occuring EBITDA) below 3.5x (adjusted per Moody's standard definitions) on a normalized basis.

The principal methodology used in these ratings was Global Paper and Forest Products Industry published in October 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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