Tembec may reduce C$327 million of bank debt with the refund in duties that it is owed as part of the trade agreement that the U.S. and Canada reached last week. The agreement resolves a long-running softwood lumber trade dispute between the two countries that has imposed heavy duties on Canadian lumber companies. Brian Bogart, analyst at KDP Advisors, said in a report that the Canadian forests products company may use the proceeds from the refund to either reduce the bank debt or bolster its cash balance.
Tembec's bonds jumped after the U.S and Canada agreed to lift export duties on softwood lumber companies that export to the U.S. Tembec's 7 3/4% '12 bonds surged eight points to 58, while its 8 5/8% '09 notes increased to 62 from 54 1/4. The U.S. has also agreed to return 80% of the C$5 billion in duties it has collected since 2002. The bonds of other Canadian lumber companies also traded up. Domtar's bonds were up one-and-a-half points, while Abitibi Consolidated's bonds were up a point. The bonds of Bowater, a paper company with mills in the U.S. and Canada, gained three-quarters of a point.
Bogart said Tembec stands to benefit the most from a lift in duties because it exports a large percentage of its lumber to the U.S. The U.S. government imposed a 10.2% duty rate on Canadian companies exporting softwood lumber. This was reduced from more than 20% in December. Tembec's exports to the U.S. represent a third of its sales, said Bogart, "The largest portion of Tembec's product line is lumber, much of which is subject to U.S. duties," said Bogart. Under the terms of the deal, Tembec would receive a refund of about 78% of duties, or C$255 million.
Last week Tembec reported a C$168.2 million net loss in the second quarter, compared with a C$26.2 million net loss in the same period last year. Its EBITDA for the quarter was C$4.9 million, compared with C$6.7 million in the same quarter of 2005. In a release, the company blamed the strength of the Canadian dollar and higher chemical and energy costs for the fall in results. A spokesman did not return calls.
Daniel Parker, analyst at Standard & Poor's, said the liquidity of some Canadian companies would receive a big boost. He added that several are in dire financial condition. Tembec, for instance, is rated CCC- by the rating agency and would be the most likely to be subject to a rating change. But he declined to comment to what extent it could be upgraded.
