Fitch Upgrades Georgia-Pacifics Ratings; Outlook Stable

Fitch Ratings has upgraded the ratings of Georgia-Pacific LLC (GP) as follows:

–Issuer Default Rating (IDR) to ‘BB+’ from ‘BB’;

–Senior secured revolver to ‘BBB-‘ from ‘BB+’;

–First lien term loans to ‘BBB- ‘from ‘BB+’;

–Guaranteed senior unsecured notes to ‘BB+’ from ‘BB’;

–Senior unsecured bonds/notes to ‘BB’ from ‘BB-‘.

The upgrade acknowledges GP’s history of dedication to debt reduction and the propensity for further debt reduction. The Rating Outlook is Stable.

Continuing a recurring theme of improving its financial profile, GP has lowered its gross debt/EBITDA to 3.1 times (x) at the end of the second quarter from 3.3x at the start of the year. Probabilities favor more free cash flow and further debt reduction. The lynchpin of GP’s earnings power is its tissue business which accounts for approximately 70% of total EBITDA, and this, excepting Europe, looks to be on firm ground moving into the balance of 2010. The competition is trying to recapture margins lost to higher feedstock virgin and recycled fiber costs, and GP is backward integrated into pulp feedstocks. GP’s tissue business is getting a strong assist from corrugated packaging and pulp. Volumes are strong with two price increases enacted so far this year in the box business, and the strength of product demand is outpacing higher unit fiber costs. Lagging behind, but on a better track than last year, is GP’s Building Products business with its fortunes tied to homebuilding. No immediate rebound is expected for this business which is positioned for recovery at the bottom of the cycle.

Over the course of the next two years, GP will have approximately $4.1 billion or around 40% of its debt maturing. This includes secured term loans and legacy unsecured bonds. Fitch projects free cash flow in 2011/12 of $2.7 billion, leaving $1.4 billion to be repaid/refinanced from existing liquidity ($2.8 billion at the end of the second quarter) and/or new debt issuance. At the end of the second quarter GP’s unused revolver ($425 million maturing this December and $1.25 billion maturing in October 2012) plus cash on hand totaled $2.1 billion and was supplemented by an undrawn domestic accounts receivable securitization program of $700 million.

GP has also been actively building its business portfolio with some financial assistance from its parent, Koch Industries, Inc. (Koch). GP just closed on the acquisition of Grant Forest Products’ three oriented strand board plants for $426 million. The company has also just closed the acquisition of two pulp mills and related assets from Parsons & Whittemore Enterprises Corporation for an undisclosed amount. Koch is in the process of adding approximately half of both acquisitions’ costs as new equity, which improves leverage metrics.

For the year, Fitch expects that GP will earn between $3.2 billion and $3.5 billion in EBITDA, will repay approximately $800 million in debt, and will end the year with a 2.6x-3.1x gross debt/EBITDA leverage metric. This excludes estimated unfunded pension and asbestos liabilities which, if added, would push the leverage metric to 4.0x. The company is well within the parameters of the financial tests within its revolver and term loans, and the prognosis is good for further debt reduction in 2011 as Building Products’ operations improve assisted by the two new pulp mills. Further rating upgrades will depend on the magnitude of this debt reduction and the turn in the results of GP’s Building Products’ business.

Applicable Criteria and Related Research:

–‘Corporate Rating Methodology’, dated Aug. 16, 2010;

–‘Liquidity Considerations for Corporate Issuers’, dated June 12, 2007.

Applicable Criteria and Related Research:

Corporate Rating Methodology

Liquidity Considerations for Corporate Issuers