Pope & Talbot Rtgs Off S&P Watch; Rtgs Affirmed

Business Wire, Feb 6, 1998

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 2/6/98-- Standard & Poor's today affirmed its double-'B'-plus corporate credit and senior unsecured debt ratings of Pope & Talbot Inc. and removed them from CreditWatch where they were placed with negative implications Dec. 17, 1997. The ratings outlook is negative. Pope & Talbot has successfully increased its ownership interest in unrated Harmac Pacific Inc. (which operates a large kraft pulp mill in British Columbia) to 53.5% at a cost of about $53 million. Though fairly high cost, the Harmac mill benefits from a long-term supply contract that assures access to fiber. Harmac's preliminary agreement to purchase two pulp mills from double-'A' rated Kimberly-Clark Corp. for $540 million now appears very unlikely to be consummated. However, Pope & Talbot has stated its intent to expand further within pulp and wood products via acquisition. At the same time, Pope & Talbot has announced the expected sale of its tissue business to single-'B'-plus rated Plainwell Inc. for $147 million in cash and assumed liabilities.

Following completion of the transactions, Pope & Talbot's operations will be much more concentrated in highly cyclical pulp, with earnings and cash flow likely to be even more volatile than in the past. Though pulp and lumber markets do not always move in tandem, pulp markets are currently very weak, with recovery from the 1996-1997 downturn impeded by turmoil in Asia. Lumber prices are also currently under pressure due to lower wood products exports from North America to Asia. Moreover, Pope & Talbot, like other lumber producers with operations in Canada, is affected by tariffs on certain exports to the U.S. Even with some price improvement, operating margins are likely to average only around 10% during the next few years, with return on permanent capital expected to remain weak, well below 10%.

Importantly, Pope & Talbot's ratings benefit from the company's consistently conservative financial policies and capital structure. Pro forma for the transactions, debt to capital will be about 35%, with both Pope & Talbot and Harmac expected to have material cash balances initially. Low debt levels should keep pretax interest coverage and the funds from operations to debt ratio at levels acceptable for the rating category, averaging about 2.0 times (x) to 3.0x and 20% to 25%, respectively.

OUTLOOK: NEGATIVE

The negative outlook reflects concerns that potential sizable acquisitions could negatively affect Pope & Talbot's credit quality. Also, if pulp markets weaken further, ratings could be lowered. -- Crditwire

CONTACT: Cynthia Werneth, New York (1) 212/208-1707

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