Fitch Ratings has assigned an expected rating of ‘BBB’ to the proposed note issuance by Celulosa Arauco y Constitucion S.A. (Arauco). The company currently has a foreign currency Issuer Default Rating (IDR) of ‘BBB’. Proceeds from the issuance, which is expected to total up to USD500 million, will be used for debt refinancing among other general corporate purposes.
KEY RATING DRIVERS
Strong Business Position
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.
As of March 31, 2014, Arauco had USD4.9 billion of total debt. This figure included USD800 million of debt at its Montes del Plata pulp joint venture. During the last 12 months (LTM) ended Mar 31, 2014, Arauco generated USD1.2 billion of EBITDA, up from USD1.1 billion during 2013 and USD848 million in 2012. Better results are in line with higher sales of the panel business after acquisitions, and increase in energy sales related to the pulp business. For the LTM ended March 31, 2014, Arauco’s adjusted net debt/EBITDA ratio was 3.7x, which remains high for the rating categories.
Cash Flow to Grow
Arauco’s cash flow should benefit from a favorable outlook for its panels and sawn timber businesses due to strong demand for panels in Latin America and an improved U.S. housing market. During 2014, Arauco’s EBITDA should grow to close to USD1.3 billion. The company should enjoy the full output of Montes del Plata during 2015 and its net leverage should fall to less than 3.0x despite projections of weak pulp prices by Fitch. This new pulp mill will be capable of producing 1.3 million tons per year of hardwood pulp. The mill is a 50/50 joint venture between Arauco and Stora Enso and it should increase Arauco’s EBITDA by between USD175 million and USD300 million per year, depending upon pulp prices.
Manageable Liquidity Position
Arauco’s liquidity is adequate with USD505 million of cash and marketable securities. Debt amortizations total USD779 million during 2014 and USD542 million during 2015. During April 2014, Arauco refinanced part of its debt maturity through a CLF7 million bond issued in the local market (equivalent to approximately USD300 million). Proceeds from the expected international notes will be used for debt refinancing.
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 million of this land. While the company doesn’t intend to monetize them, the value of the land and biological assets is about USD4.8 billion.
Positive: By the end of 2015, Fitch projects that around 4 million tons of new pulp capacity will be added by companies in Latin America. This level of supply is significantly in excess of demand growth of around 1 million tons per year. The balancing of the market and the price outlook will depend upon the closing of old mills in the U.S., Canada and Western Europe. As its base case, Fitch believes that these plants will not close quickly and that prices will remain under pressure through the end of 2015. As a result, Arauco’s free flow generation will not be significant enough to materially lower debt. Consequently, positive rating actions are unlikely in the near term.
Negative: After the full ramp up of Montes del Plata, net adjusted leverage in excess of 3.0x during a period of weak prices could lead to a downgrade of Arauco’s ratings. A key variable in whether Arauco’s leverage remains below this level will be a conservative approach to capex and acquisitions. If the company proceeds with its MAPA project without recovering its balance sheet a negative rating action is likely. A decline in the value of the company’s forests or of Fitch’s perception of the liquidity of these assets could also lead to negative rating actions, as would a decline in the company’s position on the cost curve.
Fitch currently rates Arauco as follows:
–Long-term local and foreign currency IDRs ‘BBB’;
–Long-term national scale rating ‘AA-(cl)’;
–Senior unsecured debt issued by Arauco ‘BBB’;
–Senior unsecured debt issued by Arauco at ‘AA-(cl)’.
Alto Parana S.A. (Arauco’s Argentine operating subsidiary)
–Long-term foreign currency IDR ‘BBB’;
–Senior unsecured debt (guaranteed by Arauco) ‘BBB’.
The Rating Outlook is Stable.
Applicable Criteria and Related Research:
–‘Corporate Rating Methodology’ (May 28, 2014);
–‘Parent and Subsidiary Rating Linkage’ (Aug. 8, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage