Moody's rates Domtar notes Ba3

Moody's Investors Service said it assigned a Ba3 rating (LGD5, 75%) to Domtar Corp.'s proposed senior unsecured guaranteed notes offering due 2017 and affirmed the company's existing Ba2 corporate family rating, Baa3 (LGD2, 23% from 21%) senior secured rating, Ba3 (LGD5, 75% from 74%) senior unsecured rating and SGL-1 speculative liquidity rating.

The outlook is stable.

Proceeds will be used to fund the recently announced cash tender offer for the company's outstanding 7 7/8% notes due 2011 not funded with cash on hand and for general corporate purposes.

Domtar's Ba2 corporate family rating reflects the company's significant position as the largest fine paper producer in North America, its favorable cost position within the industry and management's commitment to debt reduction, the agency said.

Offsetting these strengths are declining demand for fine paper and weakening paper prices that are expected to constrain operating margins and free cash flow generation, the agency noted.

Challenges also include the company's lack of product and geographic diversification, and the volatile pricing for both fine paper and lumber, Moody's said.

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