S&P cuts U.S Timberlands senior debt to CC

Standard & Poor's said it lowered its corporate credit rating to CC/developing from CCC+/negative and senior unsecured debt ratings on U.S. Timberlands Klamath Falls LLC to CC from CCC+.

The outlook is developing.

"The downgrade was prompted by the company's failure to make a Nov. 17, 2003, scheduled interest payment on its $225 million 9.625% senior unsecured notes," said S&P credit analyst Dominick D'Ascoli.

S&P said the developing outlook incorporates management's efforts to sell assets to raise enough funds to make the interest payment within the 30-day grace period allowed under the indenture. If successful, ratings will likely be raised to CCC. If not, ratings will be lowered to D, the agency said.

This is the second time the company has missed a scheduled interest payment. In 2002, the company was able to make the May 15 interest payment within the 30-day grace period, avoiding default.

The ratings reflect the significant deterioration in the volume of merchantable timber on U.S. Timberlands Klamath Falls LLC's properties during the past few years. This has occurred as a result of aggressive harvest levels and transfers of property and cutting rights to an affiliate, U.S. Timberlands Yakima LLC.

The company's principal operations consist of growing and harvesting timber and selling logs and standing timber to third-party wood processors. Log prices have fallen sharply during the past few years despite a high level of housing construction and remodeling. Price weakness can be traced to customer consolidation, technological improvements in sawmilling resulting in higher log yields, and an increase in low-cost imported logs and wood products.

Consequently, to generate cash flow to meet the interest expense on its heavy debt load, the company has needed to harvest at levels well above the timber growth rate and its original harvest plans. Harvest restrictions contained in the indenture governing its $225 million senior unsecured notes have not meaningfully curtailed cutting to date.

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