Moody's downgraded its rating on Potlatch Corp.'s senior unsecured debt to Ba1 from Baa3 andchanged the outlook to stable from negative.
Ed Sustar, Moody's senior vice president, said in a statementthat the downgrade reflects Potlatch's high leverage and the rating agency's expectationthat breakeven free cash flow over the next several years will curtail the company'sability to lower it.
"In particular, oversupplied lumber markets will continueto dampen the company's financial performance," Sustar added.
In addition, the rating agency assigned the company a Ba1 corporatefamily rating, Ba1-PD probability of default rating and an SGL-1 speculative-gradeliquidity rating.
According to Moody's, Potlatch's Ba1 corporate family ratingincorporates "two notches of lift" for the company's "strong"coverage of timber assets, while its baseline rating reflects "strong liquidity"but high leverage, restricted scale and diversity and breakeven expected free cashflow generation given its REIT structure.
Additionally, the company is exposed to the volatility of thelumber market, Moody's noted.
The stable outlook, meanwhile, reflects Moody's expectation thatoperating and financial performance will get better, albeit slowly, as U.S. housingstarts improve over the next two to three years to normalized levels.
Although the company's leverage metrics are weak, Moody's expectsgradual longer-term improvements as log and lumber demand returns to more normallevels.