Fitch Affirms Empresas Copec' Ratings at 'BBB'; Outlook Stable

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

--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)';

--Senior unsecured bond line due 2024 at 'AA-(cl)';

--Senior unsecured bond line due 2044 at 'AA-(cl';

--Long-term national scale at 'AA-(cl)';

--National Equity Rating 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, IDR rated 'BBB'/Stable; National Rating '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, and the mining industry through minority investments in several companies and joint ventures.

Improvement in Financial Performance

Empresas Copec has exhibited a favorable operational performance since 2012 following better results of Arauco, and after additional capacity in the panel segment, along with a sound performance by Compania de Petroleos de Chile S.A. (Copec). During the last-12-month (LTM) period ending June 30, 2014, Empresas Copec generated USD2.0 billion of consolidated EBITDA, unchanged from USD2 billion in 2013 and an improvement on USD1.6 billion in 2012. This compares to USD7.1 billion of consolidated total debt and USD1.8 billion of cash and marketable securities, resulting in a net adjusted debt-to-EBITDA ratio of 2.6x and a total adjusted debt-to-EBITDA ratio of 3.5x. These ratios show an improvement compared to 2.8x and 3.9x, respectively as of Dec. 31, 2013.

Arauco is Major Contributor

Arauco accounts for about 60% of Empresas Copec's EBITDA during the LTM ended June 30, 2014. Arauco has gradually improved its credit metrics after leveraging acquisitions in the panels business during 2012. As of June 30 2014, Arauco's net adjusted debt/EBITDA ratio was 3.7x and adjusted debt/EBITDA was 4.3x. These ratios compare with 3.9x and 4.4x, respectively as of Dec. 31 2013; and 4.7x and 5.4x, respectively, as of Dec 31, 2012. During the last 12 months (LTM) ended June 30, 2014, Arauco generated USD1.1 billion of EBITDA.

Declining Leverage at Arauco

Fitch expects Arauco's net debt/EBITDA ratio to decline to around 2.5x during 2015. Key factors in Arauco's deleveraging are a more conservative approach to capex, a full ramp-up of the company's new pulp mill in Uruguay, Montes del Plata, and growth of cash flow in its panels business. Arauco owns 50% of Montes del Plata, which will have an annual output of 1.3 million tons of hardwood. This mill has been undergoing its ramp-up process since July 2014, and is expected to reach full capacity by the end of 2014. Montes del Plata should increase Arauco's EBITDA by between USD175 million and USD300 million per year depending upon pulp prices.

Copec Reduces Leverage after 2012 Peak

Copec is Empresas Copec's second most important business, accounting for 30% of its consolidated EBITDA. Copec's EBITDA is split relatively evenly between Chile (52%) and Colombia (48%). During the LTM ended June 30, 2014, Copec's EBITDA improved to USD600 million from USD490 million during 2012. The company was able to lower its debt to USD1.5 billion at the end of June from USD1.9 billion in 2012 with the proceeds from the sale of Terpel's assets in Chile during 2013 for USD237 million. Copec's total debt/EBITDA ratio reached 2.5x from 3.9x in 2012; and net debt/EBITDA reached 2.0x during June 2014, from 3.0x in 2012. The company's credit profile should continue strengthening as Copec increases its EBITDA from its Colombian operations.

Low Debt at Holding Company Level

Empresas Copec, the holding company, has USD363 million of debt and a strong liquidity position with USD842 million of cash. Empresas Copec services interest expenses on its debt with interest income it receives from its subsidiaries Copec and Abastible. The company's 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.

Strong Track Record of Receiving Dividends

Empresas Copec has maintained a solid track record of dividend payments received from its subsidiaries, Arauco, Copec and Abastible. It has also benefited from an improvement in the operations of its minority investment in Metrogas (39% participation). Historically, dividends received by Empresas Copec have averaged around USD400 million per year. Empresas Copec received dividends for USD427 million during the LTM ended on June 2014 and USD426 million during 2013, up from USD325 million during 2012.

RATING SENSITIVITIES

A Negative Outlook or ratings downgrade could occur should Empresas Copec's key subsidiaries witness deterioration in their operational profiles, resulting in reduced dividend payments made to their parent company, and fundamentally weaken its capital structure. Such a scenario would also likely result in the similar negative rating action being taken on the subsidiaries in question.

A positive rating action could occur if Empresas Copec is able to return to exhibit a similar capital structure to the one it maintained historically between 2001 - 2010, with adjusted net debt/EBITDA ratios maintained below 2.0x on a sustained basis.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'National Ratings - Methodology Update' (Jan. 19, 2011).

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=888694

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Contacts

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

Contacts

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