Fitch Affirms Aracruz's Ratings; Releases Corporate Credit Analysis Report.

Business Editors

CHICAGO--(BUSINESS WIRE)--April 22, 2004

Fitch Ratings has affirmed the 'BBB' senior secured local currency rating and the 'B+' foreign currency rating of Aracruz Celulose S.A. (Aracruz). In conjunction with these rating actions, Fitch has affirmed the 'AAA' rating of the 2009 notes of its wholly owned subsidiary Arcel Finance Limited (Arcel), as well as the 'BBB' rating of Arcel's notes due in 2011. The Rating Outlook of these ratings is Stable. These rating actions take into consideration the proposed issuance of another US$150 million of debt by Arcel. Proceeds from this issuance will be issued to refinance existing debt and for general corporate purposes.

Aracruz's 'BBB' senior secured local currency credit rating is supported by its strong business position, which is primarily a result of the company's low-cost production capabilities and its high-quality bleached eucalyptus kraft market pulp (BEKP). During 2003, the company's cash cost of production was one of the lowest in the world at US$144 per ton of BEKP. Aracruz's excellent cost structure has enabled it to generate positive cash flows during troughs in the volatile pulp cycle, allowing it to grow without compromising its balance sheet.

Aracruz's 'BBB' credit rating is also supported by the long-term supply contracts the company has with several large international tissue producers. During 2003, these contracts, which are subject to market prices, accounted for approximately 80% of Aracruz's sales. The company's two most important clients are both rated in the 'AA' range. As a result, the company's risk of not being paid by its customers is very low. Unlike most companies in Latin America, more than 95% of the company's sales are derived from exports. These dollar-denominated sales protect Aracruz from a mismatch between the currency of its debt and the currency of its revenues.

Aracruz ended 2003 with US$1.365 billion of debt and US$352 million of cash and marketable securities. During 2003, the company generated US$499 million of cash operating profits (EBITDA). These figures gave the company a total debt-to-EBITDA ratio of 2.7 times (x) and a net debt-to-EBITDA ratio of 2.0x. Aracruz's interest coverage ratio, as measured by EBITDA-to-interest expense, was 6.2x. These numbers were consistent with the 'BBB' senior secured local currency rating category, considering that the financial results include only six months of sales from the company's recently acquired Guaiba mill (formerly called Riocell). This mill is capable of producing about 415,000 tons of BEKP per year.

At the end of the first quarter of 2004, Aracruz had US$1.304 billion of debt and US$355 million of cash and marketable securities. During this quarter the company generated US$127 million of EBITDA. Important to note, Aracruz is also responsible for guaranteeing half of the debt of Veracel, a 50%/50% joint venture between Aracruz and Stora Enso OYJ. At the end of March the total debt at Veracel totaled US$141 million. By the time construction of this pulp mill, which is projected to produce 900,000 of BEKP per year, is completed (second half of 2005) it should have about US$650 million of total debt. Once completed, Aracruz will purchase and sell half of the production from this plant. Stora Enso OYJ will purchase the other half of the mills production. Using the very conservative assumption that all of Veracel's debt is added this year and that Aracruz's per ton EBITDA stays the same during the last nine months of 2004, this would give the company a pro-forma total debt figure of US$1.6 billion (US$1.3 million of Aracruz debt plus 50% of the Veracel debt) and an EBITDA of about US$550 million. These figures translate into a total debt-to-EBITDA ratio of 3.0x. They represent a low point in the company's credit protection measures, as beginning in 2006, Aracruz will sell about 450,000 tons of Veracel's production. This would give the company an EBITDA of approximately US$400 million when BEKP list prices are US$400 per ton and an EBITDA of approximately US$1.1 billion when prices are at US$650 per ton.

Approximately 50% of Aracruz's debt is secured by exports as of March 31, 2004. The proposed US$150 million secured export note issuance will increase this percentage. Consequently, the company's unsecured local currency rating has been notched down to 'BBB-' by Fitch to reflect different recovery rates between the debt classes due to subordination. Fitch rates the foreign and local currency obligations of the Brazilian government 'B+'. The foreign currency rating acts as a constraint upon Aracruz's senior secured foreign currency rating.

Fitch's 'BBB' rating of the company's US$400 million notes due in 2011 (Arcel Finance Limited) exceeds the sovereign rating of Brazil due to a structural enhancements that mitigate transfer and convertibility risk. The 'AAA' rating of the company's US$250 million notes due in 2009, which were also issued by Arcel Finance Limited, reflects the unconditional and irrevocable guarantee of timely principal and interest payments that has been provided by XL Capital Assurance Inc., which is also rated 'AAA' by Fitch. Like the secured export notes due in 2011, the insured notes due in 2009 are structured in a manner to minimize sovereign-related risks.

For a complete credit analysis of Aracruz, access 'www.fitchresearch.com'.