Fitch Affirms Empresas Copec at 'BBB'

CHICAGO--()--Fitch Ratings has affirmed the following ratings of Empresas Copec:

--Foreign and local currency Issuer Default Ratings (IDRs) at 'BBB';
--Senior unsecured bond line No. 623 and bond program at 'AA-(cl)';
--Senior unsecured bond line No. 624 and bond program at 'AA-(cl)';
--Long-term national scale at 'AA-(cl)';
--Equity Rating affirmed at 'Primera Clase Nivel 1'.

The Rating Outlook for Empresas Copec is Stable.

KEY RATING DRIVERS
Empresas Copec's ratings reflect the strong business positions and sound credit profile of its main operating subsidiaries Celulosa Arauco y Constitucion S.A. (Arauco, rated 'BBB' and 'AA-(cl)' by Fitch), Compania de Petroleos de Chile S.A. (Copec) and Abastecedora de Combustibles S.A. (Abastible). The company also participates in natural gas distribution, energy generation and the mining industry through minority investments in several companies and joint ventures.

The company's recent financial performance has improved. During the latest-12-month (LTM) period ending June 30, 2013, Empresas Copec generated USD1.8 billion of consolidated EBITDA. This compares with USD6.8 billion of consolidated total debt and USD1.7 billion of cash and marketable securities, resulting in a net debt-to-EBITDA ratio of 2.8 times (x) and a total debt-to-EBITDA ratio of 3.7x. These ratios show an improvement compared to 3.6x and 4.4x, respectively as of Dec. 31, 2012.

Declining Leverage at Arauco
Arauco accounts for about 55% of Empresas Copec's EBITDA during the LTM ended June 30, 2013. 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 compare with 4.7x and 5.4x, respectively, as of Dec 31, 2012. During the last 12 months (LTM) ended June 30, 2013, Arauco generated USD987 million of EBITDA. Fitch expects Arauco's net debt/EBITDA ratio to decline to around 3.2x by the end 2013 and below 2.5x during 2015. Key factors in Arauco's 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.

Copec Improves following Completion of Terpel Acquisition:
Copec is Empresas Copec's second most important business, accounting for 32% of its consolidated EBITDA. Copec's EBITDA is split relatively evenly between Chile (55%) and Colombia (45%). During the LTM ended June 30, 2013, Copec's EBITDA improved to USD581 million from USD490 million during 2012. The company was able to lower its debt to USD1.6 billion at the end of June with the proceeds from the sale of Terpel's assets in Chile during 2013 for USD237 million. The combination of these factors has led to a reduction in Copec's total debt/EBITDA ratio to 2.8x from 3.9x in 2012. The company's credit profile should continue strengthening as Copec increases its EBITDA from its Colombian operations

Low Leverage at Holding Company Level:
Empresas Copec, the holding company, has USD370 million of debt and a strong liquidity position with USD449 million of cash. Empresas Copec services interest expenses on its debt with interest income it receives from its subsidiaries Copec and Abastible. Its debt relates to two bond issuances in the Chilean market. The first one was used to finance the Terpel acquisition during 2009. The second issuance was placed at the end of 2011 and was used to finance the acquisition of Inversiones Nordeste (IN) by Abastible. Empresas Copec has shown a strong track record of receiving dividends from its subsidiaries, Arauco, Copec and Abastible. It has also benefited from an improvement of the operations of its minority investment in Metrogas (39% participation). Historically, dividends received by Empresas Copec have averaged around USD400 million per year. During 2012, dividends received by Empresas Copec declined to USD325 million due to a weaker performance of Arauco in 2012 and a reduction of dividends distributed by Copec.

RATING SENSITIVITIES
A positive rating action could occur if Empresas Copec is able to return to debt levels closer to those maintained by the company historically. A negative rating action is not likely in the near to medium term. Arauco is considering replacing an old pulp mill with a new line. If this project goes forward, Fitch believes Empresas Copec's capital structure is strong enough that a negative rating action would not be likely.

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: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=804820
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Contacts

Fitch Ratings
Primary Analyst:
Joe Bormann, CFA, +1-312-368-3349
Managing Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Monica Coeymans, +56-2-499-3312
Director
or
Committee Chairperson:
Rina Jarufe, +56-2-499-3310
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Joe Bormann, CFA, +1-312-368-3349
Managing Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Monica Coeymans, +56-2-499-3312
Director
or
Committee Chairperson:
Rina Jarufe, +56-2-499-3310
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com