(Rio De Janeiro, August 26, 2016) Fitch Ratings has affirmed the Long-Term Foreign and Local Currency (LT FC/LC) Issuer Default Ratings (IDRs) for Empresas CMPC S.A. (CMPC) at ‘BBB+’. The Rating Outlook is revised to Negative from Stable. Fitch has also affirmed the LT FC IDR for Inversiones CMPC at ‘BBB+’ and revised its Rating Outlook to Negative from Stable. A full list of rating actions follows at the end of this release.
The revision of the Outlook to Negative reflects Fitch’s base case projections that CMPC’s net leverage will remain above 3.0x in 2016, which is materially higher than previously projected following more than 12 months of full operations of the Guaiba II pulp mill. Despite higher pulp sales volume, company results were negatively impacted by strengthening of the U.S. dollar, soft pulp prices and lower sales in the paper division. If net leverage falls to below 2.5x during 2017, the Negative Outlook would likely be revised.
Inversiones CMPC is a wholly-owned subsidiary of CMPC and is incorporated in the Cayman Islands as an exempted limited liability company. All of Inversiones CMPC’s debt is unconditionally guaranteed by CMPC. Its ratings have been linked to those of CMPC through Fitch’s Parent and Subsidiary Rating Linkage Criteria.
KEY RATING DRIVERS
Excellent Regional Tissue Business
CMPC’s credit ratings reflect its strong business positions within Latin America. The company is the leading tissue producer in Chile, Peru, Argentina and Uruguay and has a growing presence in markets such as Brazil and Mexico. CMPC’s strong market position in tissue, which accounted for 22% of its EBITDA during the first half of 2016 (1H16), is the result of the strong brand equity of its products, its low production cost structure, and strong distribution network. CMPC is also the largest producer of packaging paper, boxboard, corrugated boxes and multiwall bags in Chile. Its paper and paper products divisions accounted for an additional 13% of EBITDA.
Solid Pulp Position
CMPC has a strong position in market pulp, as it is the third-largest market pulp producer globally, with an annual production capacity of hardwood and softwood pulp of 4.1 million tons. CMPC’s new pulp mill started operations in May 2015 and added 1.3 million tons of additional eucalyptus market pulp production capacity in Brazil. Pulp and forest division sales generated 65% of the company’s 1H16 EBITDA. The company’s cash production costs are amongst the lowest in the world for both hardwood and softwood pulp, ensuring its long-term competitiveness.
Significant Forestry Investments
A key credit consideration that continues to support CMPC’s investment-grade credit profile is its ownership of about 1 million hectares of land throughout Chile, Brazil, and Argentina, where the company developed about 658,100 hectares of forestry assets. The plantations are valued at USD3.5 billion. Importantly, the nearly ideal conditions for growing trees in the region make these plantations extremely efficient by global standards and give the company a sustainable advantage in terms of cost of fiber and transportation costs between forest and mills.
KEY ASSUMPTIONS
Fitch’s key assumptions within the rating case for CMPC include:
–Pulp sales volume of 3.6 million tons.
—Hardwood prices between USD550 and USD600 per ton during 2016-2017.
–USD617 million CAPEX in 2016 and USD667 million from 2017.
–CFFO between USD750 million and USD800 million in 2016-2017. (Source: press release)