Fitch Affirms Celulosa Argentina's IDR at 'B-'; Outlook Negative

CHICAGO--()--Fitch Ratings has affirmed the following ratings of Celulosa Argentina S.A. (Celulosa):

--Foreign currency IDR at 'B-';

--Local currency IDR at 'B-'.

The Rating Outlook is Negative.

KEY RATING DRIVERS

Celulosa's ratings reflect the following: exposure to Argentina, solid market position, vertically integrated business model, volatile cash flow generation, dependence on import restrictions, moderate leverage, and tight liquidity.

Celulosa is an integrated pulp, paper and forest products manufacturer in Argentina and Uruguay. As of the Feb. 28, 2014 latest twelve months (LTM), Celulosa reported consolidated sales and EBITDA of US$383 million and US$50 million, respectively. EBITDA has improved over fiscal year-end (FYE) May 2013. Planned maintenance occurred in the May 2013 FY and Celulosa was able to benefit from increased prices as a result of Argentina's double-digit inflation. .

Argentina is the company's largest market and contributes 84% to total sales and 70% to consolidated EBITDA. Argentina's interventionist policies of capital bans and import restrictions create an environment of uncertainty, which also hinders Celulosa's expansion. As a result, Celulosa's IDR is constrained by Argentina's country ceiling of 'B-'.

Celulosa has vertically integrated production and distribution operations, although it remains dependent on third parties for its raw material. Celulosa has a strong market share in the domestic market, and a diversified and stable customer base. Celulosa benefits from import tariffs and other agreements. Among them is a bilateral trade agreement between the governments of Argentina and Brazil that limits Brazilian paper imports and reduces competition in the domestic market. Celulosa's vulnerability to raw materials is moderate. As of today, 95% of wood purchases are done on a spot basis, exposing Celulosa to prices and volume risks. Celulosa has production assets in Argentina and Uruguay, the latter through its subsidiary Fanapel.

Compared to its peers in Chile and Brazil, Celulosa is small in size in both revenue and volume. This results in relatively weak cost structure. Celulosa's lower economies of scale increase exposure to the industry's high levels of volatility in international pulp prices. Celulosa is also exposed to double-digit inflation in Argentina and other direct and in-direct sovereign related risks, including transfer and convertibility risks.

Leverage is moderate. As of Feb. 28, 2014, Celulosa had US$154 million of debt, relatively unchanged from FYE May 2013. Total debt/EBITDA is 3.0x as of the Feb. 28, 2014 LTM and net debt/EBITDA is 2.9x. Both ratios are unchanged when compared to last year. Fitch expects leverage to increase in 2015 when Celulosa's new tissue machine begins operations. The machine is being financed by the vendor with a US$25 million loan financing.

Post FYE 2015, Fitch expects Celulosa to manage its balance sheet to a target ratio of debt-to EBITDA of around 3.0x and be able to rollover its existing debt in the local financial market. Celulosa is exploring a new path and recently invested in a tissue machine. Celulosa expects that the machine will begin operations in 2015 and make a healthy contribution to sales and EBITDA. Once the machine is fully operating, Fitch believes Celulosa will manage its balance sheet to a target ratio of debt-to-EBITDA of around 3.0x.

Celulosa's liquidity is tight and exposes the company to refinancing risk. As of February 2014 Celulosa had US$4.5 million of cash and marketable securities and US$86 million of short term debt. Historically, Celulosa has had a high concentration of its financial debt in the short term and has consistently been able to refinance these trade lines of credit. Fitch expects Celulosa to continue successfully rolling over its existing debt in the local financial market.

Celulosa's ratings reflect exposure to domestic economic conditions. The high level of uncertainty of the Argentine economy through capital controls and import restrictions is preventing Celulosa from rolling out any major capital expenditure plan. Under this scenario, capital expenditures are expected to remain at maintenance levels (approximately US$15 million). Free cash flow will likely be used to gradually reduce leverage.

RATING SENSITIVITIES

Celulosa's foreign & local currency IDRs of could be adversely affected by a downgrade of the Argentine sovereign rating (currently rated 'B-' with a Negative Outlook by Fitch).

A prolonged downturn in pulp & paper prices that result in a material weakening of Celulosa's capital structure could also precipitate a rating downgrade.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28 2014).

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=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832379

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Contacts

Fitch Ratings, New York
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Associate Director
Cristina Madero, +1-312-368-2080
or
Fitch Ratings, Inc.,
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Director
Monica Coeymans, +56-2-2499-3314
or
Committee Chairperson
Managing Director
Joseph Bormann, CFA, +1-312-368-3349

Sharing

Contacts

Fitch Ratings, New York
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Associate Director
Cristina Madero, +1-312-368-2080
or
Fitch Ratings, Inc.,
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Director
Monica Coeymans, +56-2-2499-3314
or
Committee Chairperson
Managing Director
Joseph Bormann, CFA, +1-312-368-3349