Fitch Affirms Empresas Copec at 'BBB'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Empresas Copec S.A.'s ratings as follows:

--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'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Empresas Copec's ratings reflect the strong business positions and sound credit profile of its main operating subsidiaries Celulosa Arauco y Constitucion S.A. (Arauco, IDR rated 'BBB'/Stable; National Rating 'AA-(cl)' 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.

Moderate Improvement of Financial Performance

Empresas Copec generated USD2.1 billion EBITDA during the LTM in June 2015, which is relatively stable when compared to 2014. Arauco has shown some improvement of its pulp segment due to the start of operations of the Montes del Plata pulp mill. Demand for panels has been strong in North America, while the MDF segment has shown increase competition and oversupply in Latin-American markets. The fuel business has shown a relatively stable performance. Copec improved its operational performance in Chile due to higher volumes, better logistics and a revamped commercial strategy. Empresas Copec net leverage during the LTM was 2.3x as the company had USD6.5 billion of total debt and USD1.5 billion of cash.

Arauco a Key Credit Consideration

Arauco accounted for about 60% of Empresas Copec's EBITDA during the LTM ended June 30, 2015. Arauco has decreased its debt levels and gradually improved its credit metrics after leveraging acquisitions in the panels business during 2012. As of June 30 2015, Arauco's net debt/EBITDA ratio was 3.3x. This figure compares with USD4.6 billion of total debt, which included USD575 million of debt at its Montes del Plata pulp joint venture. Arauco's EBITDA should grow to about USD1.35 billion during 2015 from USD1.225 billion in 2014 and its net leverage should fall to below 3.0x, as the company will enjoy a year's production from Montes del Plata. This new pulp mill is capable of producing 1.3 million tons per year of hardwood pulp, of which 50% belongs to Arauco.

Low Leverage at Copec

Copec is Empresas Copec's second most important business, accounting for 30% of its consolidated EBITDA. Copec's EBITDA is split between Chile (62%) and Colombia (38%). Copec's EBITDA was USD554 million during the LTM, which was similar to the level of cash generation during 2014 despite lower fuel prices (negative impact of FIFO accounting methods) and the devaluation of the Chilean and Colombian currencies. The company's debt was USD1 billion at the end of June (excluding intercompany debt), which pushed net leverage to below 2.0x.

Low Debt at Holding Company Level

Empresas Copec, the holding company, has USD421 million of debt and a strong liquidity position with USD696 million of cash. Empresas Copec services interest expenses on its debt with interest income it receives from its subsidiaries Copec and Abastible. The 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.

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 an improvement in the operations of its minority investment in Metrogas (39% participation). Historically, dividends received by Empresas Copec have averaged around USD380 million per year. Empresas Copec received dividends for USD345 million during the LTM ended on June 2015 and USD305 million during 2014.

KEY ASSUMPTIONS

--Consolidated EBITDA margin close to 10%.

--Consolidated Capex: 2015: 730 million; 2016: 825 million; 2017: USD917 million

Celulosa Arauco

--Hardwood pulp Net CIF price: 2015: USD575/m3; 2016 USD625/m3.

--Softwood pulp Net CIF price: 2015: USD685/m3; 2016 USD705/m3.

--Capex: 2015: USD457 million; 2016 USD560 million.

Copec Combustibles

--EBITDA margin in the range of 3.1% to 3.5% in 2015-2016.

--Maintenance Capex of USD200 million/year.

--Total Debt to EBITDA to remain solid around 2.5x.

RATING SENSITIVITIES

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.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991688

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991688

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20151001006967/en/

Fitch Ratings
Primary Analyst
Jay Djemal, +1-312-368-3134
Director
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Rina Jarufe, +562 2499 3310
Senior Director
or
Committee Chairperson
Joe Bormann, CFA, +1-312-368-3349
Managing Director
or
Media Relations
Alyssa Castelli, +1-212-908-0540
[email protected]

Source: Fitch Ratings

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