Fitch Affirms Arauco at 'BBB'; Outlook Stable
--Foreign and local currency Issuer Default Ratings (IDRs) at 'BBB';
--Long-term national scale rating at 'AA-(cl)';
--Senior unsecured international debt at 'BBB';
--Senior unsecured national debt at 'AA-(cl)'.
The Rating Outlook for Arauco is Stable.
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.
Net Leverage to Decrease
Arauco's adjusted net debt/EBITDA and debt/EBITDA ratios for the LTM ended June 30, 2015 were 3.3x and 3.7x, respectively. Both ratios mark an improvement over the year-end net debt/EBITDA of 3.4x and debt/EBITDA of 4.2x but continue to remain elevated for the rating level. Arauco had USD4.6 billion of total debt at the end of June, which included USD595 million of debt at its Montes del Plata pulp joint venture. Fitch projects Arauco?s EBITDA to grow to around USD1.350 billion, from USD1.225 billion in 2014 as the company will enjoy the full output of Montes del Plata. This new pulp mill is capable of producing 1.3 million tons per year of hardwood pulp, of which 50% belong to Arauco. Despite weak pulp prices, this mill is projected by Fitch to increase Arauco's EBITDA by USD100 million in 2015 and USD120 million in 2016, which show lower the company's net leverage to below 2.5x.
Free Cash Flow to Grow
Arauco's free cash flow should benefit from the additional production capacity of the Montes del Plata mill and lower CAPEX in the next few years. Investments consist of general maintenance of the industrial and forestry business of about USD500 million annually and a new panel mill in United States. This mill will cost USD325 million investment and should increase the company's board production capacity by 750,000 cubic meters per year. The 24-months construction period for this board mill is expected to be completed during 2018. The mill should add around USD50 million per year of additional EBITDA.
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 hectares of this land. While the company doesn't intend to monetize them, the value of the land and biological assets is about USD4.7 billion.
--Hardwood pulp Net CIF price: 2015: USD575/m3; 2016 USD625/m3; 2017: USD675/m3;
--Softwood pulp Net CIF price: 2015: USD685/m3; 2016 USD700/m3; 2017: USD700/m3;
--Capex: 2015: USD457 million; 2016 USD560 million; 2017: USD640 million;
--Consistent debt reduction.
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, or receiving additional support from its parent company, Empresas Copec, a negative rating action is likely.
Positive: A Positive rating action is not likely in the near term.
Manageable Liquidity Position
Arauco's liquidity is adequate with USD511 million of cash and marketable securities. Debt amortizations total USD330 million during 2015, USD457 million during 2016, USD512 million during 2017 and USD139 million during 2018.