Fitch Affirms Ratings of Celulosa Arauco y Constitucion S.A.

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the national scale rating, Issuer Default Ratings (IDR) and debt ratings of Celulosa Arauco y Constitucion S.A. (Arauco). A full list of rating actions is shown below.

Fitch has also assigned a foreign currency IDR of 'BBB+' to Alto Parana S.A. and has affirmed its $270 million notes due in 2017. Alto Parana S.A. is Arauco's operating subsidiary in Argentina. The IDR of Alto Parana assumes all future issuance would continue to be fully and unconditionally guaranteed by Arauco, as are the 2017 notes. The rating of Alto Parana is being linked to that of Arauco through Fitch's parent and subsidiary methodology.

The credit ratings incorporate Arauco's unique position as both a low cost producer of market pulp globally and an industry leader in size. The combination of these two factors has allowed the company to generate strong cash flow throughout the pulp price cycle. The company's ratings also take into consideration the company's ability to grow both organically and through acquisitions, while maintaining a lowly leveraged capital structure. Further factored into Arauco's credit ratings is its ownership of 1.6 million hectares of land in Latin America, on which it has developed about 1 million hectares of softwood and hardwood forest plantations. The accounting value of the land and forests is approximately $4.6 billion.

Arauco's performance during 2010 was in line with Fitch's expectations. During 2010, the company generated $1.287 billion of EBITDA, an increase from $724 million of EBITDA during 2009. Adjusted for the net effect of insurance collections related to the earthquake that struck Chile during February 2010, the company's 2010 EBITDA was $1.401 billion. Arauco's funds from operations (FFO) and cash from operations (CFO) also grew at a similar pace during 2010. FFO increased to $1.420 billion from $637 million, while CFO grew to $1.137 million from $751 million. Higher prices were the main driver of the increase in the company's cash flow measures, as volumes suffered due to the earthquake.

During 2010, Arauco spent $632 million on forestry assets and capital expenditures and distributed $159 million of dividends, resulting in $346 million of free cash flow. The company ended the year with $2.530 billion of net debt, a decline from $2.668 billion during 2009. Arauco had a TD/EBITDA ratio of 2.7 times (x) during 2010 and a ND/EBITDA ratio of 1.9x. These ratios would have been even stronger if insurance proceeds were included in the EBITDA calculation. These leverage ratios are similar to Arauco's five-year average leverage and net leverage ratios of 2.7x and 2.3x, respectively. Arauco's liquidity position is comfortable. The company had $912 million of cash as of March 31, 2011 and only $522 million of short-term debt. Arauco enjoys excellent access to capital markets and will likely refinance a portion of its short-term debt.

Fitch expects Arauco's EBITDA to climb to approximately $1.5 billion during 2011 and its CFO to exceed $1.1 billion. The improvement in the company's cash flow is expected to come from strong demand for board products in Latin America, higher pulp volumes due to the full output of the company's mills, and higher average prices for most of the company's products. Arauco will likely spend more than $800 million on capital expenses and forestry acquisitions during 2011. The largest investments include a new board plant in Brazil and the company's equity contribution to Montes del Plata, a pulp mill that is being built jointly with Stora Enso in Uruguay. Net debt isn't expected to change materially because of the large capital expenditure program. As a result, the company's net debt to EBITDA ratio should be about 1.7x.

Arauco's rating is considered strong in the rating category. The credit ratings would likely be affirmed under most acquisition scenarios, the most likely being for board manufacturers in the region. A number of pulp manufacturers in the region have announced a series of new projects. Unless a few of these projects are delayed, pulp prices could come under pressure between 2013 and 2015.

Empresas Copec, S.A. (Copec) owns 99.98% of Arauco. Copec, a leading conglomerate in Chile, is also involved in fuel distribution, power generation, fishing and gas distribution. AntarChile S.A. (AntarChile) directly and indirectly owns 60.82% of Copec. AntarChile, in turn, is 74.29% owned by the Angelini Group, headed by Roberto Angelini. Fitch's international scale rating for Copec is 'BBB+' and its national scale rating for AntarChile is 'AA-(chl)'.

Fitch affirms Arauco's ratings as follows:

--Foreign currency IDR at 'BBB+';
--Local currency IDR at 'BBB+';
--Senior unsecured debt at 'BBB+';
--National Scale at 'AA(cl)';
--Senior unsecured Chilean peso denominated bond lines and the bonds issued through those programs at 'AA (cl)'.

The Rating Outlook for both Arauco and Alto Parana S.A. is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 13, 2010);
--'Parent and Subsidiary Rating Linkage' (July 14, 2010);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Rating Corporates Above the Country Ceiling' (Jan. 5, 2011).

Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Parent and Subsidiary Rating Linkage Criteria Report
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Rating Corporates Above the Country Ceiling
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=594985

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