RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed Empresas Copec S.A.'s Issuer Default Rating (IDR) at 'BBB' and its national scale rating at 'AA-(cl)'. The Rating Outlook remains Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Empresas Copec's 'BBB' rating reflects the strong business position, diversification and sound credit profile of its main operating subsidiaries Celulosa Arauco y Constitucion S.A. (Arauco, IDR 'BBB'/Outlook Negative; National Rating 'AA-(cl)'/Outlook Negative 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.
High Leverage at Arauco
Arauco accounted for about 60% of Empresas Copec's EBITDA during the LTM ended June 30, 2016. Arauco's adjusted net debt/EBITDA and total debt/EBITDA ratios for the LTM ended June 30, 2016 were 3.6x and 4.0x, respectively, per Fitch's calculation, and are not consistent with our expectation of fast deleveraging post Montes del Plata pulp mill start-up . Both ratios increased over the year-end net debt/EBITDA of 3.2x and total debt/EBITDA of 3.6x and remain elevated. Leverage increased due to weak pulp prices and the acquisition of a board manufacturer. Further deterioration at Arauco's credit profile could result in pressure to Empresas Copec's rating and/or Rating Outlook.
Acquisitions Impact Consolidated Leverage
The acquisitions made by Abastible in Peru and Ecuador, by Copec in USA and by Arauco in Europe amount to approximately USD1Bn and have resulted in an increase in Empresas Copec's consolidated leverage. Per Fitch's calculation, Empresas Copec's pro-forma Net Debt / EBITDA ratio for 2016 could climb to 2.8x from 2.3x in 2015, leaving Empresas Copec with little head room for new inorganic growth or to face further economic downturns.
Low Holding Company Debt
Empresas Copec, the holding company, had USD421 million of debt as of June 30, 2016 and a strong liquidity position with USD539 million of cash. Empresas Copec services interest expenses on its debt with interest income it receives from its subsidiaries Copec and Abastible, as well as the dividends received from these companies and Arauco. The holding company's debt relates to three 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. The last one was issued in November of 2014 and it was used by its subsidiary Copec to prepay debt. A new issuance is being prepared to finance the new acquisition 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 cash flow from its minority investment in Metrogas (39% participation). Historically, dividends received by Empresas Copec have averaged around USD350 million per year. Empresas Copec received dividends for USD334 million during the LTM ended on June 2015 and USD329 million during 2015.
Fitch's key assumptions within the rating case for Empresas Copec include:
--Consolidated EBITDA margin close to 11%;
--Consolidated Capex, including acquisitions: 2016: 2.0 billion, 2017: 912 million, 2018: USD940 million.
--Pulp sales volume between 3.6 million tons and 3.8 million tons;
--Softwood prices of USD600 per ton during 2016-2017;
--USD620 million CAPEX in 2016 and USD670 million from 2017.
--EBITDA margin of 4.9% in 2016-2017;
--Maintenance Capex of USD200 million/year, plus investments in MAPCO;
--Total Debt to EBITDA reaching 2.9 in 2016, to decrease to 2.5x in the following years.
A Negative Outlook or rating 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 net leverage above 3.0x for a sustained period could trigger a downgrade or a negative rating action.
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.
At both the individual and consolidated levels, Empresas Copec maintains a strong liquidity position. As of June 30, 2016, the company had USD539 million of cash and marketable securities at the holding company level and USD1.6 billion on a consolidated basis. The largest holders of cash at the subsidiary levels are Arauco (USD527 million) and Copec (USD438 million). On a consolidated basis, cash balance covers short-term debt and current maturities by 1.9x.
FULL LIST OF RATING ACTIONS
--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 No.791 and bond program at 'AA-(cl)';
--Senior unsecured bond line No.792 and bond program at 'AA-(cl)';
--Long-term national scale at 'AA-(cl)';
--National Equity Rating at 'Primera Clase Nivel 1'.
Additional information is available on www.fitchratings.com.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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