Dec 06, 2005. /Lesprom Network/. International Paper was downgraded to the lowest investment grade rating Monday by Moody's Investors Service, reflecting growing concerns about the paper giant's plans to restructure its business, sell significant assets and pay down debt. The downgrade, to Baa3 from Baa2 for the company's long-term debt and to Prime-3 from Prime-2 for its short-term debt, affects $12.6 billion of outstanding securities. In July, International Paper announced it would sell most of its timberlands as part of a plan to focus its operations and improve profitability. The sale of its timberlands will remove what Moody's called a "latent debt reduction cushion," increasing the need for the company to improve its financial position in order to keep its investment grade rating. The rating agency also noted that International Paper is executing its plan amid growing price pressures and concern that economic conditions will moderate, thereby limiting the magnitude and duration of the ongoing commodity price recovery. While International Paper also has said it will use some of the proceeds to reduce debt, Moody's raised concerns about whether debt will be significantly cut. The company's 5.850% notes due October 30, 2012 were recently quoted at a spread over treasurys of 122 basis points, according to data provider MarketAxess. The spread on those bonds - which reflects the risk premium investors demand to hold the bonds - was half that amount early this year. In a recent report, independent research firm CreditSights warned that pulp and paper companies such as International Paper could come under pressure to use proceeds from asset sales to appease shareholders. While substantial timberlands used to be viewed as a cushion against downgrades, those assets now can represent a risk. Timberlands "used to be a positive beacon for creditors, who could sleep at night...knowing that the timberlands were a constant and readily saleable source of cash," independent research firm CreditSights wrote in a report Monday. "Now that the value of those assets has grown rapidly in recent years, shareholders have become more interested in extracting value from them, rather than allowing management to continue to lean on them as a crutch in difficult times and as protection against credit deterioration," CreditSight said.