Wednesday November 25, 2:17 pm Eastern Time

License suspension could fell timber bond rating

By Tim Ryan

NEW YORK, Nov 25 (Reuters) - Credit ratings on securities backed by
redwood timber harvests and issued by the Scotia
Pacific Co. could be felled by Moody's Investors Service in the wake of
the harvesting license suspension of its parent, Pacific Lumber Co.
(Palco).

Moody's Investors Service said the suspension of Palco's license earlier
this month has spurred the rating agency to put $867 million in Timber
Collateralized Notes
issued by Scotia on review for possible downgrade.

Palco -- a subsidiary of Houston, Texas-based MAXXAM Inc. (AMEX:MXM -
news) -- had its license to harvest suspended by the California
Department of
Forestry and Fire Protection (CDF) on Nov. 10, citing continued
violations of forest practice rules.

Robert Irelan, vice president of public relations for MAXXAM, said the
company is working to gain a timber operator's license for 1999.

``We're doing everything we know how to do to demonstrate our commitment
to comply with the law,'' he said, including increasing the size of
Palco's forest
practices compliance team, initiating a thorough review of all
procedures and a program of additional training.

``That said, there's no assurance the license will be issued,'' he
added, ``that's up to the regulators.'' He also said the company hoped
the issue would be resolved
some time next month.

Palco -- already beleaguered by stiff opposition from environmental
groups -- allegedly engaged in practices such as driving heavy equipment
through streams used
by salmon, according to reports by the State News Service in California.

However, the details of the violations were not relevant to the ratings
review, which was spurred by the license suspension, said Everett Rutan,
vice president and
senior analyst at Moody's.

``The precise nature (of the violations) was not really important to
us,'' he said.

He also said opposition from the environmental groups was not an issue
in the rating review. ``I don't think that's the main concern at the
moment, though we did
look at that going into the deal,'' he said.

Rutan also said it is possible some environmental groups could seize on
the suspension of Palco's license to bolster their fight against
harvesting of the redwoods.

Environmental opposition to Palco has ranged from blockades of logging
roads to environmental group members perching in trees.

Irelan could not say whether those protests have taken place in areas
involving redwoods collateralized in the Scotia securities.

The ratings review involves $160.7 million in 6.55 percent Class A-1
notes that currently have a rating of A1; $243.2 million of 7.11 percent
Class A-2 notes rated
A3; and $463.35 million of 7.71 percent Class A-3 notes rated Baa2.

Moody's said it was concerned that harvesting could fall off in 1999 if
Palco cannot win a new license from the CDF or find enough independent
contractors to take
up the slack.

As much as 50 to 60 percent of harvesting is already done by
contractors, Moody's said.

Maintaining the harvest at minimum levels is key to Scotia's long-term
ability to service the securities, Moody's said.

The securities were privately placed in the asset-backed market in July
and have a 30-year average life, but could be repaid sooner if the
amount of trees harvested
were to be increased.


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