Moody's Lowers Outlook on Potlatch (PCH) to Negative

Moody's Investors Service affirmed Potlatch Corporation's (Potlatch) (Nasdaq: PCH) Baa3 senior unsecured rating and changed its rating outlook to negative from stable.

"The negative rating outlook reflects our expectation of elevated leverage metrics through at least 2016," said Ed Sustar, Moody's Vice President and Senior Credit Officer. "The higher than expected leverage is a result of weak lumber prices, which have declined about 10% year-over-year, due to excess supply ", added Sustar.

Affirmations:

..Issuer: Potlatch Corporation

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Actions:

..Issuer: Potlatch Corporation

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Potlatch's Baa3 senior unsecured rating incorporates two notches of lift for the company's strong timber asset coverage (timberland estimated value to adjusted debt of 2.4x), while its baseline rating reflects strong liquidity but high leverage (5.2x, pro-forma for annualized acquisitions), 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 US sidelined supply from 2007 can readily be restarted, often faster than demand growth.

Potlatch has strong liquidity with almost full availability (as of September 2015) under its $250 committed bank line (less $1.4 million of outstanding LCs) that matures in February 2020 against debt maturities of about $27 million over the next 12 months. We estimate that the company will generate close to break-even free cash flow over the next 12 months after dividends. 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 negative outlook reflects Moody's expectation that adjusted debt to EBITDA will remain at or above 5x through at least 2016 (assuming flat lumber and log prices) and that free cash flow generation will remain weak in the current price environment. The rating could be downgraded if market conditions deteriorate such that timberland values decline significantly or if the company's normalized (mid-cycle re-occurring EBITDA) adjusted debt to EBITDA is sustained above 4.5x. In addition, Moody's would view material asset encumbrances or significant asset sales as a negative. An upgrade could result with material 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 EBITDA) below 3x (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 Credit Policy page on www.moodys.com for a copy of this methodology.

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