Sep 15, 2005. /Lesprom Network/. Standard & Poor's Ratings Services said it lowered its long-term corporate credit and senior unsecured ratings on Tembec Inc. and its subsidiary, Tembec Industries Inc., to 'CCC+' from 'B'. Standard & Poor's also lowered its short-term rating on Tembec to 'C' from 'B-2'. The outlook is negative. "Tembec is currently not generating enough funds from operations to cover its interest and maintenance capital spending obligations," said Standard & Poor's credit analyst Daniel Parker. We believe the company's cash generation will continue to be very weak because of the appreciation of the Canadian dollar to the U.S. dollar (currently at more than $0.84) and high energy and fiber costs. "Tembec has adequate liquidity to ride out multiple quarters of weak cash generation, but ultimately, Tembec's liquidity position is not sustainable absent material asset sales, a potential refund of softwood lumber duties, or improved cash generation," Mr. Parker added. The ratings on Tembec Inc. reflect its highly cyclical earnings, weak cost position, and aggressive debt levels. The ratings also reflect that the company will be cash flow negative absent improvement to the pricing environment in Canadian dollars. The debt load is onerous, and we do not believe significant asset sales are likely to occur in the near term. The company would benefit tremendously from the removal of U.S.-imposed softwood lumber duties, and a refund of the CAD290 million ($245 million) in softwood lumber duties it has paid. The exact amount of a potential refund (if any), and timing of a potential refund is difficult to predict, and is unlikely to occur this year, given the stalled negotiations and numerous legal challenges. Tembec is highly leveraged to the strength of lumber and pulp prices. Lumber prices have rallied since Hurricane Katrina, which should help. Pulp prices are also expected to rise, after declining in the past two quarters, as several producers have announced pricing increases. Nevertheless, we believe that the currency appreciation and unrelenting energy and fiber costs will prevent a material improvement in earnings. The outlook is negative. Credit measures will remain very weak in 2006, and Tembec will have to rely on its bank lines to manage through the difficult conditions in the next 12 months. If pulp or lumber prices were to decline, and the Canadian dollar continues to appreciate, Tembec's cash burn would increase and put further pressure on the ratings. The ratings could be raised, however, if liquidity and earnings were to materially improve, as a result of improving industry conditions, a resolution to the softwood lumber dispute and a return of the duties, or material asset divestitures. Tembec is the integrated forest products company producing lumber, pulps, newsprint and publishing papers, paperboard and bristols, and chemicals such as alcohol and lignosulfonates.