CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings on Celulosa Argentina S.A. (Celulosa):
--Foreign currency Issuer Default Rating (IDR) at 'B-'; Outlook Negative;
--Local currency IDR at 'B-'; Outlook Negative;
--National scale Rating at 'A(arg)'; Outlook Stable.
Rating Fundamentals
Celulosa's 'B-' ratings reflect the company's solid market position as an integrated pulp, paper and forest products manufacturer in Argentina and Uruguay. Compared to its peers in Chile and Brazil, Celulosa is small in size in both revenue and volume. This results in relatively weak cost structure. The company's lower economies of scale increase exposure to the industry's high levels of volatility in international pulp prices. The company is also exposed to double-digit inflation in Argentina and other direct and in-direct sovereign related risks, including transfer and convertibility risks.
Celulosa has vertically integrated production and distribution operations, although it remains dependent on third parties for its raw material. The company has a strong market share in the domestic market, and a diversified and stable customer base. The company benefits from import tariffs and other agreements, such as a bilateral trade agreement between the governments of Argentina and Brazil that limits Brazilian paper imports and reduces competition in the domestic market.
Celulosa's vulnerability to raw materials is high. As of today, 95% of wood purchases are done on a spot basis, exposing the company to prices and volume risks. The company has production assets in Argentina and Uruguay, the latter through its subsidiary Fanapel.
Financial results came under pressure over the last year. For the last nine months ended Feb. 28, 2013, Celulosa generated revenues ofUSD301 (+14% yoy) milliondespite lower volumes resulting from programmed stoppage of plants for maintenance. Celulosa's improved sales were achieved through a combination of price increases, and product mix. EBITDA margins, however, deteriorated (11.5% for 9mo13 vs 12.6% for 9mo12) with costs reflecting Argentina's double-digit inflation. Celulosa generated USD8.0 million of CFO for the last nine months as of February 2013. The company used this cash flow to finance capex and for the payment of preferred dividends. A recovery in production volumes will boost fourth quarter results, albeit not enough to compensate for the company's weak first half. Fitch expects FY13 EBITDA of around USD52 million.
Since May 2012, Celulosa's debt has increased by 7% to USD168.0 million of debt. Nevertheless, Celulosa's 9mo of 4.4x remains low relative to its rating peers (5.7x average/median gross leverage for 'B-'-rated corporates) Fitch further expects that the company will manage its balance sheet to a target ratio of debt-to EBITDA of around 3.0x. The estimated interest coverage is expected to be around 3.0x.
Celulosa's liquidity is tight and exposes the company to refinancing risk. As of February 2013 Celulosa had USD6.5 million of cash and marketable securities and USD89.7 million of short term debt. Historically, the company has had a high concentration of its financial debt in the short term and has consistently been able to refinance these trade lines of credit. Fitch expects that Celulosa will continue to successfully rollover its existing debt in the local financial market.
Celulosa's ratings reflect the company's exposure to domestic economic conditions. The high level of uncertainty of the Argentine economy through capital controls and import restrictions is preventing the company from rolling out any major capital expenditure plan. Under this scenario, capital expenditures are expected to remain at maintenance levels; at approximately USD 15 million. Free cash flow will likely be used to gradually reduce leverage.
Rating Sensitivities
The Foreign Currency & Local Currency IDR of Celulosa could be affected by a downgrade of the Argentine sovereign rating (currently 'B-' with a Negative Outlook).
Also a prolonged downturn in pulp & paper prices that result in a material weakening of the company's capital structure could produce a rating downgrade.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' dated Aug. 8, 2012;
--'Liquidity Considerations for Corporate Issues' dated June 12, 2007.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792656
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