Sep. 23, 2009 (Business Wire) -- Fitch Ratings has placed the following ratings of Empresas CMPC S.A. (CMPC) on Rating Watch Negative:
--Foreign currency Issuer Default Rating (IDR) 'A-';
--Local currency IDR 'A-';
--Senior unsecured debt bond due 2013 'A-';
--National scale rating 'AA+(chl)';
--Senior unsecured local bond lines as well as all debt issued under these programs 'AA+(chl)'.
The rating action follow the announcement by the CMPC that it had signed a memorandum of understanding with Aracruz Celulose S.A. (Aracruz) that could result in the company purchasing several assets owned by Aracruz in Brazil for USD1.4 billion. These assets consist of a pulp mill with 450,000 tons of annual production capacity, a paper plant with 60,000 tons of capacity, and 212,000 hectares of land. In addition to these assets, CMPC would benefit from receiving permits that would allow it to build a second pulp line with an annual production capacity of 1.3 million tons per year.
Transaction to Leverage CMPC:
CMPC intends to fund the potential transaction with a mix of existing cash, new debt, and up to USD500 million of additional equity. Assuming the company is successful in its equity issuance, the transaction would increase its net debt on a pro forma basis to approximately USD2.350 billion, from USD1.432 billion as of June 30, 2009. Fitch estimates the assets that would be purchased from Aracruz generated about USD120 million of EBITDA during 2008, and will generate less than USD100 million of EBITDA during 2009. On a pro forma basis, Fitch estimates that CMPC's EBITDA would be about USD930 million during the peak of the pulp, paper and forest products price cycle, while its EBITDA would be about USD680 million during the trough in the cycle. In combination with the new debt, these figures would translate into a peak net debt-to-EBITDA ratio of 2.5 times (x) and a ratio of 3.5x during the trough of the price cycle. These ratios would not be consistent with 'A-'/'AA+(chl)' rating and are significantly higher than the 1.8x ratio averaged by CMPC during the past five years.
Transaction Benefits Long-Term Competitiveness:
This transaction is viewed positively by Fitch from a business risk perspective for a variety reasons. First, it would expand the company's presence in bleached eucalyptus kraft pulp, the fastest growth segment of the pulp market. Second, it would significantly expand the company's forestry base in one of the most competitive countries in the world, in terms of production costs. Third, it would provide a strong foundation for future brownfield expansions, allowing the company to grow at rate similar to its key customers. An additional positive consideration is improved geographic diversification into a country that strongly supports the pulp industry. Finally, CMPC should benefit from acquiring some of the genetic plant knowledge developed by Aracruz.
Aracruz Ratings Remain 'BB-'; Rating Watch Positive:
Fitch rates Aracruz 'BB-', Rating Watch Positive. Aracruz is owned by Votorantim Celulose e Papel S.A. (VCP), which is in turn owned by Fibria S.A. The sale of the aforementioned assets is positive for Aracruz's credit profile and is part of Fibria management's overall strategy to improve its financial strength. Aracruz and VCP are in the process of being merged into a single entity. This will also be positive for Aracruz's creditors since at this time the debt of Aracruz is not guaranteed by VCP.
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