S&P Lowers Outlook on Weyerhaeuser (WY) to Negative; Affirms Ratings
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Standard & Poor's Ratings Services today said it revised its outlook on Weyerhaeuser Co. (NYSE: WY) to negative from stable. At the same time, we affirmed the ratings on Weyerhaeuser, including the 'BBB-' corporate credit rating.
"The outlook revision on Weyerhaeuser Co. follows the company's announcement that it intends to acquire 645,000 acres of timberlands for $2.65 billion, said Standard & Poor's credit analyst Tobias Crabtree. "Although we expect the acquisition to be funded with a balanced mix of debt and equity, key credit measures will initially be weaker than we had previously anticipated, with leverage above 4x EBITDA on a pro forma basis in 2013," he added.
The negative outlook reflects our estimate that additional debt used to fund the proposed timberlands acquisition will push leverage above 4x EBITDA in 2013, which is higher than we had previously anticipated. We expect an improving U.S. home construction market to drive demand for Weyerhaeuser's products and push leverage below 4x in 2014. This is still high relative to the rating, but would indicate an improving trend.
We would lower our rating if management ultimately decides to finance the $2.65 billion acquisition with less than 50% equity, which would push leverage even higher than our current estimates and which we would view as indicative of a shift to more aggressive financial policies. Furthermore, given that credit ratios are already weak relative to the rating, we would downgrade Weyerhaeuser if the U.S. housing recovery stalled such that we no longer expected ratios to improve significantly.
An upgrade is unlikely in the next 24 months, given current elevated leverage ratios. We could revise our outlook back to stable if Weyerhaeuser ultimately finances the acquisition with a higher proportion of equity (perhaps two-thirds). We would view this to be an important indication of management's commitment to credit quality and would more likely enable credit measures to improve to a level consistent with the an "intermediate" financial risk profile (i.e. leverage at or below 3x EBITDA).
"The outlook revision on Weyerhaeuser Co. follows the company's announcement that it intends to acquire 645,000 acres of timberlands for $2.65 billion, said Standard & Poor's credit analyst Tobias Crabtree. "Although we expect the acquisition to be funded with a balanced mix of debt and equity, key credit measures will initially be weaker than we had previously anticipated, with leverage above 4x EBITDA on a pro forma basis in 2013," he added.
The negative outlook reflects our estimate that additional debt used to fund the proposed timberlands acquisition will push leverage above 4x EBITDA in 2013, which is higher than we had previously anticipated. We expect an improving U.S. home construction market to drive demand for Weyerhaeuser's products and push leverage below 4x in 2014. This is still high relative to the rating, but would indicate an improving trend.
We would lower our rating if management ultimately decides to finance the $2.65 billion acquisition with less than 50% equity, which would push leverage even higher than our current estimates and which we would view as indicative of a shift to more aggressive financial policies. Furthermore, given that credit ratios are already weak relative to the rating, we would downgrade Weyerhaeuser if the U.S. housing recovery stalled such that we no longer expected ratios to improve significantly.
An upgrade is unlikely in the next 24 months, given current elevated leverage ratios. We could revise our outlook back to stable if Weyerhaeuser ultimately finances the acquisition with a higher proportion of equity (perhaps two-thirds). We would view this to be an important indication of management's commitment to credit quality and would more likely enable credit measures to improve to a level consistent with the an "intermediate" financial risk profile (i.e. leverage at or below 3x EBITDA).
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