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Fitch Downgrades Empresas Copec's IDRs at 'BBB'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has taken the following rating actions on Empresas Copec:

--Foreign and local currency Issuer Default Ratings (IDRs) downgraded to 'BBB' from 'BBB+';

--Senior unsecured bond line No. 623 and bond programs registered under the line downgraded to 'AA-(cl)' from 'AA(cl)';

--Senior unsecured bond line No. 624 and bond programs registered under the line downgraded to 'AA-(cl)' from 'AA(cl)';

--Long-term national scale downgraded to 'AA-(cl)' from 'AA(cl)';

--Equity Rating affirmed at 'Primera Clase Nivel 1'.

The Rating Outlook is Stable.

The rating actions on Empresas Copec's ratings is based upon the weakened financial profile of its main subsidiaries Celulosa Arauco y Constitucion S.A. (Arauco) and Compania de Petroleos de Chile (Copec), which represent near 90% of its consolidated EBITDA. Both companies have shown a more aggressive approach to growth over the past couple of years that has resulted in higher leverage on their balance sheets. As a result, Empresas Copec's net debt-to-EBITDA ratio increased to 3.2 times (x) as of June 30, 2012 from 2.0x as of Dec. 31, 2011, while it net adjusted debt to EBITDA ratio increased to 3.5x from 2.1x.

The rating actions also factor in Fitch's expectation for sluggish pulp prices in the next few years, which should prevent a material reduction in Arauco's debt with free cash flow from operations. The downgrades also reflect Fitch's expectation that the Empresas Copec's capital structure will not be managed to the levels that it was between 2002 and 2011, when its net debt-to-EBITDA ratio averaged 2.0x.

During the latest 12 months (LTM) ended June 30, 2012, Empresas Copec generated USD1.6 billion of EBITDA. Arauco is Empresas Copec's most important subsidiary, accounting for 63% of its LTM EBITDA, while Copec accounted for 26%. Empresas Copec had USD6.4 billion of debt, of which Arauco has USD4 billion and Copec USD1.7 billion. During 2012, Empresas Copec should be affected by weaker performance of Arauco and tighter operational margins at the fuel business, with Fitch projections indicating approximately USD1.6 billion of consolidated EBITDA during 2012, down from USD2 billion during 2011. Arauco's EBITDA should be about $1 billion during 2012, including insurance receipts for business interruption.

Empresas Copec's solid investment grade ratings continue to reflect the sound business positions of its main operating subsidiary Arauco, rated 'BBB'/Outlook Stable and 'AA-(cl)', Copec and Abastecedora de Combustibles S.A. (Abastible). The company also participates in natural gas distribution, energy generation and the mining industry through its minority investments in several companies and joint ventures.

Arauco Aggressive Debt Financed Acquisitions:

Arauco has shown an aggressive approach to growth over the past couple of years that has resulted in a leveraging of the company's capital structure. The company has increased its leverage through the acquisition of additional board assets in the U.S. (Moncure and Flakeboard); the purchase of land in Brazil through a joint venture; and the funding structure of its Uruguay pulp joint venture, Montes del Plata.

As of June 30, 2012, Arauco has USD4.3 billion of debt, considering USD339 million of guaranteed debt at its pulp joint venture Montes del Plata, and generated USD1 billion of EBITDA. Resulting in a net debt/EBITDA ratio of 3.3x and a net adjusted debt to EBITDA ratio of 3.6x. These ratios compare unfavorably with 2.2x and 2.3x during 2011. By the end of 2012, Fitch projects these ratios will further increase to 3.8x and 4.4x, respectively. The increase is primarily due to weak pulp prices and the completion of the acquisition of Flakebard during September.

Copec Increased Leverage After Completion of Terpel Acquisition:

During the past few years, Copec spent USD760 million to obtain a 98.24% participation in Proenergia, the controller shareholder of Terpel. Copec started to consolidate Proenergia during December 2010, which added and USD600 million of debt. Terpel with 1,800 retail gas stations is the largest fuel retail chain in Colombia with 40% market share. This acquisition has improved the company's product and geographic diversification.

Copec generates around USD550 million EBITDA and has USD1.7 billion of debt. Copec's intentions are to lower debt with proceeds from the sale of Terpel's Chilean operations for about USD300 million. This sale, which was sought be regulators, should be completed during 2013.

Low Leverage at Holding Company Level:

Empresas Copec, the holding company, has USD370 million of debt, and a strong liquidity position with USD400 million of cash. Empresas Copec services interest expenses of its debt with interest income it receives from its subsidiaries Copec and Abastible. Its debt relates to two 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.

Empresas Copec has shown a strong track record of dividends received from its subsidiaries, Arauco and Copec. It has benefited from an improvement of the operations of its minority investment in Metrogas (39% participation). Historically ,dividends received by Empresas Copec have been in the range of USD400 million on average. During 2012, dividends received by Empresas Copec should decline due to the weaker performance of Arauco and a potential reduction of dividends distributed by Copec to improve liquidity of this subsidiary.

Rating Outlook:

The Rating Outlook is Stable. A positive rating action is not likely in the near term due to Fitch's view that pulp prices will remain at low levels in the near-term, which limits operating free cash flow of Arauco to reduce debt, affecting Empresas Copec at consolidated level. A return to debt levels closer to those maintained by the company historically for a period of time would be viewed positively and could lead to an upgrade of the company's ratings. A negative rating action is not likely in the near-to-medium term. Arauco is considering replacing an old pulp mill with a new line. If this project goes forward, it expected to have a capital structure that would not result in a negative rating action.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'National Ratings - Methodology Update' (Jan. 19, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

National Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885

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Fitch Ratings
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Joe Bormann, CFA, +1 312-368-3349
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Fitch, Inc.
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Director
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Source: Fitch Ratings