Fitch Initiates 'BBB-' IDRs for Votorantim Celulose e Papel.
VCP's most important advantage vis-a-vis its international pulp and paper competitors is its ability to produce bleached eucalyptus kraft pulp (BEKP) for approximately $215 per ton. In comparison, most European and North American pulp companies spend more than $300 to produce one ton of pulp. VCP's excellent cost structure has allowed it to remain quite profitable during the trough of the pulp and paper cycle. The company's competitive advantage is viewed to be sustainable as it is primarily a result of VCP's access to inexpensive fiber. This fiber is obtained from eucalyptus trees grown on plantations that are managed by the company. VCP's cost advantage is further enhanced by low labor expenses, in comparison with its competitors in the Northern Hemisphere, as well as its modern pulp and paper mills.
Exports represent nearly one-half of VCP's sales revenues and hedge the company's risk against a significant devaluation of the Brazilian real. VCP's international clients are divided almost evenly between tissue producers (39%), paper manufacturers (39%) and specialty paper producers (21%). VCP plans to expand its annual market pulp production capacity to 3.5 million tons from 1.4 million within the next five years. This expansion will significantly increase the company's exports and further mitigate its exposure to the Brazilian economy.
VCP ended Sept. 30, 2006 with $1.544 billion of debt and $748 million of cash and marketable securities. During the nine months of 2006, VCP generated $350 million of EBITDA. These figures translate into a net debt-to-EBITDA ratio of 1.7 times (x) and a total debt-to-EBITDA ratio of 3.3x. VCP accounts for its investments in Ripasa (50%) and Aracruz (12.4%) by the equity method. Ripasa is expected to generate about $200 million of EBITDA in 2006 and had $235 million of net debt as of Sept. 30, 2006. Aracruz's 2006 EBITDA is estimated to be about $800 million and it should end the year with a net debt of about $1.1 billion. Accounting for these investments on a proportional basis would result in VCP having a net debt of about $1.050 billion for 2006 and a combined EBITDA of $675 million.
During the next 12 months, VCP has $364 million of debt falling due. About $200 million of this figure is short-term trade finance lines, which are likely to be rolled over. Given VCP's strong cash flow from operations and large cash position, the company should have ample liquidity to pay these obligations if it is not able to refinance them.
Fitch rates the Brazilian government's foreign currency obligations 'BB' with a Stable Rating Outlook, and Brazil has a country ceiling of 'BB+'. Country ceilings reflect Fitch's judgment regarding the risk of capital and exchange controls being imposed by sovereign authorities that would prevent or materially impede the private sector's ability to convert local currency into foreign currency and transfer to non-resident creditors (i.e., transfer and convertibility [T&C] risk). VCP's 'BBB-' foreign currency IDR exceeds Brazil's country ceiling by one notch due to the amount of its exports relative to its foreign currency liabilities, as well as the amount of cash it retains. Exports are viewed favorably from a credit perspective in the event of T&C restriction because the company could keep a small portion of dollar denominated export proceeds abroad via transfer pricing. Brazilian companies can also keep exports abroad for a reasonable period of time before being forced to repatriate proceeds from exports sales. This cash could also be used to service foreign debt obligations. VCP is on pace to generate about $600 million of exports in 2006. This figure compares with about $327 million of debt that amortizes in hard currency during the next 12 months and about $110 million of debt service on non-amortizing, hard currency debt obligations.
When considering a company's cash position, Fitch applies an aggressive discount to reflect the difficulty in predicting the timing of sovereign controls and the likelihood that such controls would severely or completely limit a company's ability to use its onshore liquidity to pay offshore debt service. VCP's cash position of $748 million covers hard currency debt service that comes due in the next 12 months by a ratio of 1.7x.
At Luiz Antonio, VCP has a pulp mill that produces 385,000 tons of pulp per year and two paper machines that have a combined annual production capacity of 350,000 tons of uncoated printing and writing paper. This site is VCP's second largest production unit and probably accounts for about $160 million of EBITDA. According to VCP's agreement with International Paper (IP) that was announced on Sept. 19, 2006 the Luiz Antonio assets and forest base will be transferred to IP on Feb. 1, 2007 in exchange for a pulp mill that is under construction near Tres Lagaos in the state of Mato Grosso do Sul (MS) and the related forests. All construction costs for this 1.1 million ton pulp mill, which should startup in 2009, will be paid by IP.
The loss of the Luiz Antonio mill should decrease VCP's EBITDA by about $160 million in 2007 and 2008. This loss will be partly offset by a 150,000 ton increase in the production of pulp at Jacarei and by the improving performance of Ripasa, which will be 50% consolidated in 2007. The net affect of these changes is that everything remaining the same in terms of prices -- VCP's 2007 EBITDA should be about $475 million, including Ripasa, and its net debt should be close to $900 million. This gives the company a net leverage ratio which is close to 1.9x -- consistent with the 'BBB-' rating -- and a total debt ratio of 3.5x -- weak for the rating category . Not until 2009, will VCP get a boost in its EBITDA when the Tres Lagaos mill begins operations. At current prices this mill would increase VCP's EBITDA by about $275 million per year.
On a proforma basis, considering the asset swap with International Paper that will become effective in February 2007, Votorantim Celulose e Papel (VCP) is the third largest producer of market pulp and uncoated paper in Brazil and the leading manufacturer of coated paper.
A comprehensive credit analysis of Suzano is available on the Fitch Ratings web site at www.fitchratings.com.
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|Date:||Nov 21, 2006|
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