Fitch Affirms Arauco's IDRs at 'BBB'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Celulosa Arauco y Constitucion S.A.'s (Arauco) ratings as follows:

--Foreign and local currency Issuer Default Ratings (IDRs) at 'BBB';

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

--Senior unsecured debt issued by Arauco at 'BBB';

--Senior unsecured debt issued by Arauco at 'AA-(cl)'.

The Rating Outlook for Arauco is Stable

Fitch also affirms and withdraws the 'BBB' foreign currency IDR and 'BBB' unsecured debt ratings of Arauco's Argentine operating subsidiary, Alto Parana S.A. The ratings have been withdrawn as they are not analytically significant since the debt it has issued is unconditionally guaranteed by Arauco.

KEY RATING DRIVERS

Strong Business Position

Arauco's ratings are supported by its strong business position and financial profile. The company is the second largest market pulp company in the world and has one of the lowest cost structures in the industry, which allows it to generate strong operating cash flows during market downturns. Arauco's competitive cost advantage is viewed to be sustainable due to its productive forest plantations. The company's forestry advantages are further enhanced by its modern production equipment, energy self-sufficiency, and low transportation costs due to the close proximity of its plantations, mills, and ports.

High Leverage

As of June 30, 2014, Arauco had USD5.0 billion of total debt. This figure included USD805 million of debt at its Montes del Plata pulp joint venture. During the last 12 months (LTM) ended June 30, 2014, Arauco generated USD1.1 billion of EBITDA, unchanged from USD1.1 billion during 2013 and an improvement on USD848 million in 2012. Better results are in line with higher sales of pulp and sawn timber divisions. The panel segment has shown decreasing performance due to lower activity in the Brazilian market, mainly in the MDF segment. For the LTM ended June 30, 2014, Arauco's adjusted net debt/EBITDA ratio for the period was 3.7x. This ratio marks an improvement over the year-end net debt/EBITDA ratio of 3.9x, itself a significant improvement to 4.8x in 2012, but continues to remain elevated for the rating categories.

Cash Flow to Grow

Arauco's cash flow should benefit from a favorable outlook for its panels and sawn timber businesses due to favorable demand for panels in Latin America and an improved U.S. housing market. During 2014, Arauco's EBITDA should grow to close to USD1.3 billion. The company should enjoy the full output of Montes del Plata during 2015 and its net leverage should fall to less than 3.0x despite projections of weak pulp prices by Fitch. This new pulp mill will be capable of producing 1.3 million tons per year of hardwood pulp. The mill is a 50/50 joint venture between Arauco and Stora Enso Oyj (Stora Enso) and it should increase Arauco's EBITDA by between USD175 million and USD300 million per year, depending upon pulp prices.

Manageable Liquidity Position

Arauco's liquidity is adequate with USD640 million of cash and marketable securities. Debt amortizations total USD555 million during 2014, USD540 million during 2015, USD517 million during 2016 and USD561 million during 2017. Arauco has secured funding intended to refinance its short term debt maturities. During April 2014, Arauco issued a UF7 million bond in the local market (equivalent to approximately USD300 million) and during July 2014 the company issued a USD500 million 10-year bullet amortizing bond in the international capital markets.

Forestry Holdings

A key credit consideration that continues to support Arauco's ratings despite weakness in the pulp cycle is its significant forestry holdings. The company owns about 1.7 million hectares of land throughout Chile, Brazil, Argentina and Uruguay. Forest plantations have been developed on about 1 million hectares of this land. While the company doesn't intend to monetize them, the value of the land and biological assets is about USD4.9 billion. Fitch considers these assets to be highly liquid, as demonstrated by the sale of 210,000 hectares of land in Brazil by Fibria Celulose S.A. (Fibria, IDR rated 'BBB-' with a Stable Outlook by Fitch) during December 2013 for approximately USD700 million.

RATING SENSITIVITIES

Positive: By the end of 2015, Fitch projects that around four million tons of new pulp capacity will be added by companies in Latin America. This level of supply is significantly in excess of demand growth of around 1 million tons per year. The balancing of the market and the price outlook will depend upon the closing of old mills in the U.S., Canada and Western Europe. As its base case, Fitch believes that these plants will not close quickly and that prices will remain under pressure through the end of 2015. Consequently, challenging conditions in the global pulp market combined with the potential for possible further investments by Arauco could limit positive rating actions in the near term.

Negative: After the full ramp up of Montes del Plata, net adjusted leverage in excess of 3.0x during a period of weak prices could lead to a downgrade of Arauco's ratings. A key variable in whether Arauco's leverage remains below this level will be a conservative approach to capex and acquisitions. If the company proceeds with its MAPA project without recovering its balance sheet a negative rating action is likely. A decline in the value of the company's forests or of Fitch's perception of the liquidity of these assets could also lead to negative rating actions, as would a decline in the company's position on the cost curve.

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=888754

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Contacts

Fitch Ratings
Primary Analyst
Jay Djemal
Director
+1-312-368-3134
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Coeymans
Director
+56-2-499-3312
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty
+1 212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jay Djemal
Director
+1-312-368-3134
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Coeymans
Director
+56-2-499-3312
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty
+1 212-908-0526
New York
elizabeth.fogerty@fitchratings.com