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Ainsworth Lumber shored up its liquidity position earlier this summer when it refinanced its revolver with a new USD 100m term loan. But the runway that refinancing paved for the company could be shorter than the eight quarters management initially forecasted due to the inexorable slide of the US dollar against the Canadian dollar, said two bondholders and two sellside analysts.
The Canada-based company might have to tap next year a USD 50m carve-out in its senior note indentures to stay liquid through 2009, said one of the buysiders and the two sellsiders.
“We are looking at some opportunities or options on how to increase liquidity,” said Bruce Rose, Ainsworth’s general manager of corporate development. The manufacturer of oriented strand board (OSB) – a construction material with high exposure to the crashing homebuilding market – has not tapped the basket yet, said Rose.
“It depends on market prices, and it depends on cash burn,” said Rose. Rose added that the company does not forecast for liquidity events, and that he was not in a position to say whether Ainsworth presently needed additional liquidity.
Ainsworth’s USD 275m 7.25% senior unsecured bonds due 2012 slid to 67 with a 17.5% yield on 31 October from 72 with a 15.5% yield on 19 September, roughly when the dollar hit parity with the Canadian dollar. The bonds began September at 70, MarketAxess showed. Similarly, Ainsworth’s USD 175m Libor+ 375bps senior unsecured floating rate notes due 2010 also traded off mid-September highs, landing at 75.5 today from 78 on 21 September, per MarketAxess.
At the end of 2Q07, Ainsworth had roughly USD 175m in available liquidity – excluding the USD 50m carve-out – following the refinancing of its revolver with the Goldman Sachs-led USD 100m Libor+ 300bps term loan, according to its conference call transcript for the quarter. The confluence of soft pricing for North Central OSB and a weakening US dollar could cause Ainsworth to burn through more than half that cushion by year end, said the market participants.
The average selling price for OSB in 3Q07 was USD 177/000sf, said Rose, one of the bondholders and one of the sellsiders. At that price, OSB prices are just barely above Ainsworth’s USD 165/000sf cost to manufacture the material in its Minnesota facilities and USD 30 above the USD 145/000sf cost to manufacture in Canada, an Ainsworth presentation showed.
Despite that positive margin, EBITDA in 3Q07 will likely fall between negative USD 5m and negative USD 15m because of the strengthening CAD, said two bondholders and a third sellsider. The first two sellsiders projected less trenchant losses with Ainsworth’s 3Q07 EBITDA falling from just slightly positive to negative USD 5m. The US dollar began the year at roughly USD 1.13 to the CAD. But it has experienced a USD 0.20 drop since then, falling below parity in mid-September.
Prospects for the rest of the year look even gloomier as 3Q07 will be the strongest quarter for OSB pricing in 2007, said all the market participants. Average North Central oriented strand board prices were USD 144/000sf and USD 156/000sf in 1Q07 and 2Q07, respectively, said Rose. Prices in 4Q07 have declined back into a band of USD 150/000sf, said one of the first two sellsiders.
Earnings reports from a competitor in the OSB space, Norbord, also point toward negative EBITDA for Ainsworth, said one of the bondholders and one of the analysts. Norbord, the second largest OSB producer in North America, earned just USD 3m in positive EBITDA from its US assets in 3Q07, said a Norbord spokesperson.
Ainsworth generated negative USD 15m EBITDA in 1Q07 and negative USD 19m in 2Q07, according to its 2Q07 conference call transcript. With roughly USD 70m in annual interest expense and roughly USD 70m in capex, the company could burn USD 140m of cash in 2007 based on zero EBITDA, said two bondholders and two sellsiders. Throw in USD 4m-USD 6m in EBITDA lost for each cent the USD decreases against the CAD and Ainsworth might have to dig into its USD 50m carve-out sometime in 1H08, said two of the sellsiders.
“This company doesn’t work at CAD 105 against the dollar,” said a third sellsider. Especially when OSB hovers around the company’s cost to manufacture.
Slumping OSB is unlikely to rebound in 2008 as new, more efficient mills come online, offsetting the curtailments to OSB capacity enacted this year by Ainsworth, Louisiana Pacific, Weyerhauser and Norbord, said one of the bondholders and all three sellsiders.
“Ainsworth is curtailing production at some of our mills because of operating losses, a lack of profitable OSB orders, and a shortage of logs in Minnesota,” said Rose. The company announced on 23 October that it would close its Cook, Minnesota-based facility for most of November and the last week of December. For a month during 4Q07, Ainsworth will close mills in Bemidji, Minnesota and Grand Prairie, Alberta, and for one week, it will close its mill in Barwick, Ontario. Ainsworth will also close its largest mill at High Level in Alberta for three weeks in December, according to a 29 October press release.
Ainsworth will disclose its 3Q07 earnings in the first week of November, said Rose.
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