Fitch warned that Weyerhaeuser's jumbo special dividend could send the timber giant's credit rating further into junk territory, even as investors continued to applaud the windfall.

The ratings agency acknowledged that Weyerhaeuser's proposals to convert into a real estate investment trust, which has sparked the $5.6bn payout, had "defined economic benefits".

As a trust, or Reit, most of the group's forestry profits will go to investors without taxmen taking a cut.

However, Fitch, which lowered its rating on Weyerhaeuser to junk in September, warned that the special dividend unveiled on Monday, and which the group is obliged to pay to convert to a Reit, could prove a further blow to bondholders' interests.

"The payment of these benefits to shareholders through an enhanced dividend stream could lower the prospective cash flow coverage of principal and interest and negatively affect debt ratings," the ratings agency said.

Housing setbacks

And, Fitch was joined by peers DBRS and Standard & Poor's in warning over the difficulties posed to Weyerhaeuser by the continuing US property downturn to Weyerhaeuser. The company's timber is used largely in housing, and it runs a real estate division.

"Housing starts, which directly influence Weyerhaeuser's business, have been faltering as have the prices for lumber and panels which are back to pricing levels near the close of last year," Fitch said.

Standard & Poor's flagged "uncertainties…regarding the timing and strength of the housing recovery", which DBRS said may not kick in until late next year.

"The residential construction market remains weak and recent industry indicators do not offer any concrete evidence of an imminent upturn," DBRS said.

"This poses a significant challenge for Weyerhaeuser to restore its credit metrics."

Shares soar

However, shareholders continued to warm to the special dividend, sending Weyerhaeuser shares 6% at one point on Tuesday, and taking their gains in two days nearly to 15%.

Analysts upgrading Weyerhaeuser stock after the announcement included Gail Glazerman at UBS, who lifted her rating on the shares to "buy" from "neutral", with a price target of $47.

McAdams, Wright, Ragen published a "buy" rating with a target of $60.

The shares closed 3.5% higher at $40.22 in New York.