Fitch affirms Arauco's BBB ratings on company's strong business position and financial profile, view that its competitive cost advantage is sustainable due to its productive forest plantations
October 11, 2013
– Fitch Ratings has affirmed the following ratings of Celulosa Arauco y Constitucion S.A.:
--Foreign and local currency Issuer Default Ratings (IDRs) at 'BBB';
--Long-term national scale rating at 'AA-(cl)';
--Senior unsecured debt issued by Arauco at 'BBB';
--Senior unsecured debt issued by Arauco at 'AA-(cl)'.
Fitch has also affirmed the 'BBB' foreign currency IDR of Arauco's Argentine operating subsidiary, Alto Parana S.A., as well as its senior unsecured debt, which is by Arauco, at 'BBB'.
The Rating Outlook for both Arauco and Alto Parana is Stable.
KEY RATING DRIVERS
Arauco's ratings are supported by its strong business position and financial profile. The company is the second largest market pulp company in the world and has one of the lowest cost structures in the industry, which allows it to generate strong operating cash flows during market downturns. Arauco's competitive cost advantage is viewed to be sustainable due to its productive forest plantations. The company's forestry advantages are further enhanced by its modern production equipment, energy self-sufficiency, and low transportation costs due to the close proximity of its plantations, mills, and ports.
Arauco has gradually improved its credit metrics after leveraging acquisitions in the panels business during 2012. As of June 30 2013, Arauco's net debt/EBITDA ratio was 3.9x, while its net adjusted debt/EBITDA ratio was 4.6x. These ratios, which remain high for the rating categories, compare with 4.7x and 5.4x, respectively, as of Dec. 31, 2012. The rating considers Fitch expectations that Arauco will be able to continue deleveraging in terms of net debt/EBITDA to around 3.2x by the end 2013 and below 2.5x during 2015.
Key factors in deleveraging are a more conservative approach to capex, growth of cash flow in its panels business, and a full ramp up of the company's new pulp mill in Uruguay, Montes del Plata. Arauco's owns 50% of Montes del Plata, which will have an annual output of 1.3 million tons of hardwood, will be ramped up throughout the end of 2013 and the beginning of 2014. This mill should increase Arauco's EBITDA by between USD175 million and USD300 million per year, depending upon pulp prices.
During the last 12 months (LTM) ended June 30, 2013, Arauco generated USD987 million of EBITDA. The company's EBITDA should increase to around USD1.1 billion by the end of the year.
For 2013 and 2014, Arauco's EBITDA should continue to improve due to a favorable outlook for its panels and sawn timber businesses, which should benefit from economic growth in Latin America, as well as a gradually improving U.S. housing market. On the pulp segment, prices are expected to remain weak during 2014 due to additional capacity that will be added within Latin America. In addition to Montes del Plata, a new mill in Brazil -- Maranhao -- should start operations by the end of 2013 or 2014 with 1.5 million tons annual.
Arauco's total adjusted debt at the end of June was USD5.2 billion. This debt figure includes USD626 million of guaranteed debt at its Montes del Plata pulp joint venture. Arauco's liquidity is strong with USD746 million of cash and marketable securities. Debt amortizations total USD751 million during 2013 and USD333 million during 2014. During July 2013, Arauco refinanced part of its debt maturity through a USD300 million bank loan with maturity in 2016. The company expects to gradually deleverage. Fitch projects Arauco's net debt should decrease by around USD200 million to about USD3.6 billion by the end of 2013.
A key credit consideration that continues to support Arauco's ratings despite weakness in the pulp cycle is its significant forestry holdings. The company owns about 1.7 million hectares of land throughout Chile, Brazil, Argentina and Uruguay. Forest plantations have been developed on about 1.0 million of this land. While the company doesn't intend to monetize them, the value of the land and biological assets is about USD4.5 billion.
A change in management's philosophy to maintaining a sound capital structure could result in a negative rating action. A prolonged downturn in pulp prices that would result in a material weakening of the company's capital structure could also lead to a downgrade or Rating Outlook of Negative. An upgrade is not likely in the near term due to the weak pulp market and uncertainty about the timing of several potential new pulp mills in Latin America beyond the aforementioned.
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