Potlatch Corp. Ratings Raised To #BB+# From #BB# On Stronger Earnings And Reduced Outlook Stable

Stocks and Financial Services Press Releases Friday August 11, 2017 09:19
NEW YORK--11 Aug--S&P Global Ratings
NEW YORK (S&P Global Ratings) Aug. 10, 2017--S&P Global Ratings today raised its corporate credit rating on Potlatch Corp. to 'BB+' from 'BB'. The outlook is stable.

At the same time, we raised our issue-level rating on the company's senior unsecured debt to 'BB+' from 'BB', in line with the higher corporate rating as per our notching guidelines. The recovery ratings remains '3', which reflects our expectation for meaningful (50%-70%; rounded estimate: 65%) recovery in the event of default.

The upgrade reflects the significant improvement in earnings, EBITDA generation, and credit measures over the past year, due largely to improvement in lumber pricing and demand for the timber and wood products producer. As a result, Potlatch has more than doubled EBITDA in the first six months of 2017 compared with 2016 and has reduced debt leverage to just over 3x, down from 4.2x at year-end 2016 and from 5.4x a year ago, while improving interest coverage to just over 6x from 5x.

The stable outlook reflects our expectation that Potlatch Corp. will maintain current leverage levels of well below 4x and closer to 3x over the next 12 months as the company benefits from continued strong pricing for Northwest sawlogs and lumber due to increased demand driven by housing and remodeling markets and the impact of more expensive Canadian imports due to the current tariff and the effect of reduced harvests there.

We expect that these current favorable market conditions are likely to persist over the next 12 months. Even in the event of an unexpected pullback in sawlog and lumber pricing from current high levels, we think Potlatch will maintain financial policies and cash balances sufficient to keep debt leverage below 4x.

Given the outlook for residential construction over the next 12 months, the current status of the softwood trade negotiations between the U.S. and Canada and reduced harvests and exports of timber and lumber from western Canada, we do not expect a steep rapid decline in lumber prices, thereby making a downgrade unlikely.

However, we could lower the rating if such a steep decline occurred, perhaps due to an unexpected reversal in housing starts that reduced adjusted EBITDA to about $140 million or less, which in our view would require a 40% price decline in current lumber prices.

We view an upgrade to investment grade as unlikely over the next year, given Potlatch's current exposure to volatile residential construction markets and wood products demand and pricing. Still, we could eventually upgrade Potlatch to investment grade if it expanded its less volatile resources segment (timber harvesting) through acquisitions, and therefore, reduced the earnings volatility of the company as a whole while growing in size and geographic diversity.

We could also raise our rating if Potlatch assumed a more conservative financial policy by maintaining debt leverage at below 3x even through cyclical construction cycles.

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