CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for Empresas CMPC S.A. (CMPC):
--Foreign and local currency IDR's at 'BBB+';
--Long-term national scale ratings at 'AA (cl)'
--Short-term national scale ratings at 'F1+ (cl)'
--Primera Clase Nivel equity rating at '1 (cl)'
In conjunction with these rating actions, Fitch has affirmed the following ratings for Inversiones CMPC:
--Foreign currency IDR at 'BBB+';
--Long-term national scale rating at 'AA (cl)';
--Short-term national scale rating at 'N1+ (cl)';
Fitch has also affirmed the following issuance and programs for Inversiones CMPC:
--Senior unsecured foreign currency at 'BBB+';
--National scale local currency programs at 'AA (cl)';
--Senior unsecured long-term denominated in Chilean pesos at 'AA (cl)';
--Commercial paper denominated in Chilean pesos at 'AA (cl)' and 'N1+(cl)'.
Inversiones CMPC is a wholly-owned subsidiary of Empresas CMPC (CMPC) and is incorporated in the Cayman Islands as an exempted limited liability company. All of Inversiones CMPC's debt is unconditionally guaranteed by CMPC. Its ratings have been linked to those of CMPC through Fitch's Parent and Subsidiary Rating Linkage Criteria.
The Rating Outlook of CMPC and Inversiones CMPC remains Stable.
KEY RATING DRIVERS
Excellent Business Positions Regionally
CMPC's credit ratings reflect the company's strong business positions within Latin America. CMPC is the leading tissue producer in Chile, Peru, Argentina and Uruguay and has a growing presence in several other markets in Latin America. The company's strong market position in tissue, which accounted for 23% of its Jun. 2013 LTM EBITDA, is due to the strong brand equity of its products, its low production cost structure, and strong distribution network. CMPC is also the largest producer of packaging paper, boxboard, corrugated boxes and multiwall bags in Chile. Its paper and paper products divisions accounted for an additional 22% of EBITDA. The company's position in the Chilean market for these products is viewed to be sustainable because of its modern equipment and distribution systems.
Growing Global Pulp Presence
The ratings of CMPC further factor in the company's solid position in market pulp. During the LTM ended on June 30, 2013, the company sold about 2.1 million tons of market pulp, placing it amongst the top producers of market pulp globally. These sales generated about 44% of the company's EBITDA. CMPC's presence in market pulp will grow as it plans on spending USD2.1 billion to add 1.3 million tons of additional market pulp production capacity in Brazil (Guaiba II). The company's cash production costs are amongst the lowest in the world for both hardwood and softwood pulp, ensuring its long-term competitiveness. CMPC's leading position is viewed to be sustainable due to its ownership of 1,044,000 hectares of land in Chile, Argentina and Brazil upon which it has developed 683,000 hectares of plantations. The nearly ideal conditions for growing trees in the region make these plantations extremely efficient by global standards and give the company a sustainable advantage in terms of cost of fiber and transportation costs between forest and mills.
High Leverage Relative to Historical Levels
Between 2007 and 2011 CMPC's Net /EBITDA ratio averaged 2.4x. CMPC net leverage has climbed from 2.4x in 2011 to 3.5x during 2012 and 3.2x during the LTM ended June 30, 2013. Some of the increase in leverage was due to a decline in CMPC's EBITDA to USD914 million during 2012 from USD1.1 billion in 2011 as a result of fall in pulp prices, which caused the EBITDA of the pulp division to decline to USD365 million in 2012 from USD570 million in 2011. Pulp prices continue to be deflated, which has resulted in the LTM EBITDA remaining low at approximately USD900 million. CMPC's net debt increased during 2012 to USD3.2 billion from USD2.6 billion in 2011 due to lower cash flow and the acquisition of USD300 million of forestry assets in Brazil to support the new pulp mill.
Leverage Expected to Remain Elevated in 2013 and 2014
Pulp prices should remain at low levels through the end of 2014 due to the startup of two new pulp mills in Latin America. Consequently, CMPC's EBITDA should be in the range of USD1 billion to USD1.1 billion in 2014. CMPC plans to fund its USD2.1 billion pulp project with USD750 million of equity, approximately USD200 million of asset sales and a mix of debt and operating cash flow. As a result of slightly higher cash flow and about USD1 billion of non-debt related funding for the project, net leverage should remain around 3.5x during 2014, the most important year for the construction of the mill. Fitch estimates that Guiaba II mill should enhance the company's annual EBITDA by between USD225 million and USD500 million per year, depending upon the point in the cycle, once it becomes operational in 2015. This should allow the company's leverage to fall to between 1.5x and 2.5x in 2015.
Liquidity Risk is Manageable
CMPC received nearly USD500 million from the first tranche of its equity issuance during May. It also placed in the international markets a USD500 million international bond to refinance maturities and to finance Guaiba expansion project during this month. As a result of these actions, CMPC ended June 30, 2013 with USD1.2 billion of cash and marketable securities, which compares favourably with USD560 million of short-term. A key credit consideration that further enhances CMPC's liquidity position is its ownership of about 1.0 million hectares of land throughout Chile, Brazil, and Argentina on which the company has developed about 683,000 hectares of forestry plantations. While it is unlikely the company will monetize a substantial portion of this land in the near term, the value of the land and biological assets is about USD5.0 billion.
A rating upgrade for CMPC is not likely in the near future due to high capital expenditures. Factors that could contribute to consideration of a positive rating action in the medium term include: a commitment to a stronger long-term capital structure; funding of the Guaiba II project with substantially more than USD1 billion of equity and proceeds from assets sales; and/or substantially high pulp prices than currently anticipated during 2013, 2014 and 2015.
Factors that could lead to consideration of a Negative Outlook or downgrade include a change of management's strategy with regard to the relatively conservative capital structure the company has maintained. If pulp prices fall sharply during 2014, CMPC may need to increase the equity portion of the funding of the Guaiba II mill to avoid a negative rating action.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2013)
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Parent and Subsidiary Rating Linkage