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TEXT-S&P revises Celulosa Arauco outlook to negative from stable
September 17, 2012 / 3:22 PM / in 5 years

TEXT-S&P revises Celulosa Arauco outlook to negative from stable

Sept 17 - Overview
     -- Chile-based forest-products company Arauco's currently weak 
performance is due to soft pulp prices, rising costs, and several nonrecurring 
adverse events.
     -- Debt rose significantly due to the construction of its new pulp mill 
and a recent acquisition.
     -- We are revising the outlook to negative and affirming our 'BBB' rating 
on the company.
     -- We expect debt to remain high until 2014, with some improvements in 
2013 due to more-conservative financial policies and enhanced results.

Rating Action
On Sept. 17, 2012, Standard & Poor's Ratings Services revised its outlook on 
Celulosa Arauco y Constitucion S.A. (Arauco) to negative from stable. At the 
same time, we affirmed our 'BBB' long-term corporate credit rating on the 
company.

Rationale
The outlook revision reflects Arauco's deteriorating financial risk profile 
during the past few quarters that stemmed from weaker results and high debt 
levels. Although we acknowledge that Arauco has traditionally been able to 
reduce debt despite some volatility of its businesses, we believe it would 
take at least 12-18 months for its credit metrics to be in line with the 
ratings, given our expectations of soft pulp prices in the next several 
quarters. A failure to bring the adjusted debt-to-EBITDA ratio to less than 
3.5x by the end of 2013 will likely to result in a one-notch downgrade. The 
ratings continue to reflect the company's "satisfactory" business risk profile 
and "intermediate" financial risk profile.

During the first half of 2012, Arauco's performance weakened from softer pulp 
prices and rising costs of labor, wood, and chemicals. The loss of a 450,000 
cubic meter plywood facility and 4,000 planted hectares in a wildfire in late 
2011 and a breakdown of a power generator caused operating profits to drop, by 
at least $150 million in the first half of 2012.

Also, during the first half of 2012, Arauco purchased two U.S.-based 
wood-panel producers with an aggregated capacity of 2.9 million cubic meters, 
doubling the size of its panel division and gaining control of an estimated 
30% of the U.S. panels market. In addition, its new 50%-owned pulp mill in 
Uruguay--Montes del Plata, which is currently under construction--took on part 
of the debt that its financing structure demanded. All of this caused adjusted 
debt to grow by about $500 million.

Poorer results and higher debt caused the adjusted debt-to-EBITDA ratio to 
slip to 3.9x, and the funds from operations (FFO)-to-debt ratio to weaken to 
14.9% in the 12 months ended June 30, 2012, compared with 2.0x and 44.7%, 
respectively, a year ago. We don't expect these metrics to improve 
significantly by the end of the year, as adjusted debt should remain around $4 
billion (including the debt from Montes del Plata). Although we expect the 
company's profits to recover in the second half of the year due to incremental 
profits from the recently acquired panel facilities and insurance payments on 
loss profit, EBITDA will likely remain around $1 billion on a rolling 12-month 
basis. We expect the debt-to-EBITDA ratio to improve to at least 3.5x in 2013 
and the FFO-to-debt ratio to improve to 22% due to Montes del Plata's expected 
contribution of at least $100 million to adjusted EBITDA (assuming its 
completion in June 2013).

In the next 12-18 months, we expect Arauco to reduce capital expenditures 
significantly, keeping its robust financial flexibility. We also expect the 
company to complete the integration of its acquired businesses: We believe the 
acquired U.S. assets may contribute around $150 million to annual EBITDA).

Industry conditions may remain challenging, especially for hardwood pulp, as 
we expect supply to expand by 2.5%-3.0% in 2013 and 2014 and demand to remain 
volatile. Prospects for softwood pulp (around two-thirds of Arauco's pulp 
division) are slightly better in the next 12 months, as no material expansion 
in capacity is expected, and global demand could increase.

The company's "satisfactory" business risk profile continues to reflect its 
cost-efficient operations, good market positions in global market pulp and in 
the American wood-panels markets, large and highly productive asset base, and 
business resilience.

Despite currently high debt and recent aggressive investments, we still view 
Arauco's financial risk profile as "intermediate" thanks to its strong 
capitalization, as seen in its 36.3% debt-to-capital ratio as of June 2012 and 
its historic averages in the 25%-35% range, ample ability to generate 
operating cash flows, and adequate liquidity.

Liquidity
We consider Arauco's liquidity "adequate" because we expect cash sources to 
exceed uses by at least 20%. Cash sources should also cover uses even if 
EBITDA were to decline by 20% in the next 12 months.

We also assume that cash flow from operations will be around $650 million in 
2012 and closer to $700 million in 2013, and that capital expenditures 
including acquisitions will peak at around $1 billion in 2012 and drop to less 
than $500 million in 2013. We computed dividend payments at 40% of net income 
and manageable debt maturities of $151 million in the second half of 2012 and 
$397 million in 2013.

Other factors we included in our liquidity analysis were Arauco's good access 
to international and domestic debt markets and sound relationships with banks. 
The company is likely to secure committed credit facilities in excess of $300 
million to offset cash-flow volatility.

Outlook
The negative outlook reflects our expectation that Arauco will continue 
posting weak credit metrics for the rating category in 2012 and 2013, but will 
improve in 2014 when Montes del Plata's EBITDA contribution (on an adjusted 
basis) and cash flows move credit ratios in line with its "intermediate" 
financial risk profile.

We expect Arauco to start benefiting from its acquired businesses in the U.S. 
panels sector, reduce capital expenditures, and secure financial flexibility. 
A slower-than-expected recovery in its financial performance would not be 
consistent with Arauco's financial risk profile at the current rating level, 
and therefore will merit a one-notch downgrade. In such a scenario, we would 
expect the debt-to-EBITDA ratio to be less than 3.5x by the end of 2013. An 
upgrade is unlikely at this point due to high leverage and Arauco's exposure 
to cyclical pulp prices.

Related Criteria And Research
     -- Will Pulp Projects Hamper The Financial Profiles Of Latin American 
Forest Products Companies?, Aug. 15, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed; Outlook Action
                                        To                 From
Celulosa Arauco y Constitucion S.A.
 Corporate Credit Rating                BBB/Negative/--    BBB/Stable/--

Ratings Affirmed

Celulosa Arauco y Constitucion S.A.
 Senior Unsecured                       BBB                

Alto Parana S.A.
 Senior Unsecured                       BBB                
 Senior Unsecured                       raAAA              



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

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