Aug. 24, 2009 (Business Wire) -- Fitch Ratings has affirmed Plum Creek Timber Company's (PCL) ratings as follows:
--Issuer Default Rating at 'BBB-'
--Senior unsecured bond at 'BBB-'
--Bank revolver and term loans at 'BBB-'.
The Rating Outlook is Negative.
Leverage is projected to increase through the end of this year, on its way to approaching 5.0 times (x) net debt/EBITDA as earnings soften from lower log harvests and sawtimber prices, fewer real estate sales, and with no meaningful profit contributions from panel and lumber operations. These conditions are expected to partially reverse in 2010 along with housing starts.
With a current emphasis on cash conservation, Fitch expects that PCL's focus on share repurchases will be deflected until business conditions improve. PCL did not buy back any shares in this past second quarter. A more stringent focus on the balance sheet, as evidenced by recent debt repayments, will help restore sub-investment-grade leverage metrics, and Fitch expects to see improvements in leverage moving toward 4.0x net debt/EBITDA next year.
PCL has sufficient liquidity to see itself through the recession. At the end of the second quarter, PCL had $530 million available for borrowing under its revolver and $347 million available in cash. Debt maturities are manageable near-term with no significant maturities occurring until 2011 (around $380 million in private placements) and 2012 (approximately $600 million in term loans). PCL's $750 million revolving line of credit matures in June 2011.
The retention of the Negative Outlook characterizes Fitch's margin of error in predicting highly variable earnings and cash flow from real estate sales and the company's propensity to use a significant portion of those funds to buy back stock. Acres sold by PCL have exceeded acreage purchased in every year since 2006, and PCL now has almost 25 million shares in treasury and 163 million shares outstanding. We expect PCL to be modestly free cash flow positive in 2009; however, PCL is reliant on real estate sales to fund dividends (around $275 million annually) and without those sales PCL would be significantly free cash flow negative (after capital expenditures and dividends). Longer term, PCL will need to fund capital expenditures and dividends as well as share repurchases with cash flow from operations, rather than relying on the liquidation of real estate holdings. If it begins to fund distributions to shareholders with real estate proceeds without commensurately reducing debt, a ratings downgrade would follow.
PCL is the largest private landowner in the United States with approximately 7 million acres of timberland in its portfolio. The company also produces a relatively small amount of lumber, plywood and medium density fiberboard.
Additional information on PCL can be found on the Fitch Ratings web site at 'www.fitchratings.com'.
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