CHICAGO - (Business Wire) Fitch Ratings has downgraded the following ratings of Aracruz Celulose S.A. (Aracruz):
--Local currency Issuer Default Rating (IDR) to 'BB+' from 'BBB';
--Foreign currency IDR to 'BB+' from 'BBB';
--National scale rating to 'AA-(bra)' from 'AA+(bra)'.
All of these ratings have been placed on Rating Watch Negative. In conjunction with this rating action, Fitch has placed the following rating of Votorantim Celulose e Papel (VCP) on Rating Watch Negative.
--Local currency IDR 'BBB-';
--Foreign currency IDR 'BBB-';
--National scale rating 'AA (bra)'.
These rating actions follow the announcement by Aracruz on Oct. 2, 2008, that the 'fair value' of its derivative position was a negative $1.02 billion as of Sept. 30, 2008. This position exposes the company to heightened market volatility and potential further losses should the Brazilian real continue to weaken against the U.S. dollar. The downgrades of Aracruz's credit ratings reflect an expectation that the company's leverage will increase materially as it works to limit or eliminate its derivative exposure, and that it may have to delay some of its key expansion projects.
VCP has indicated that although it has postponed the closing of its acquisition of a controlling stake in Aracruz, it is still taking steps to conclude this transaction. The placement of VCP's ratings on Rating Watch Negative indicates that if VCP proceeds with the acquisition, it could be merged with a company that has leverage higher than previously anticipated, consequently resulting in a downgrade of its ratings to 'BB+' or lower.
Aracruz ended June 30, 2008 with US$528 million of cash and marketable securities and US$1.940 billion of total adjusted debt. For the latest-12-months (LTM) ended June 30, 2008, Aracruz generated US$887 million of EBITDA, including its 50% stake in Veracel. As of June 30, 2008, VCP had US$1.903 billion of total adjusted debt and US$584 million of cash and marketable securities. For the LTM ended June 30, 2008, VCP generated US$449 million of adjusted EBITDA. The adjustment to VCP's debt and EBITDA reflect its 50% ownership in Ripasa.
Originally, a combined VCP and Aracruz, considering VCP's acquisition debt, was expected to have a net debt-to-EBITDA ratio of close to 3.0x, which was then expected to fall to about 2.5x during 2009 due to the start up of the Tres Lagoas mill during May 2009. While the price that VCP may pay for a controlling stake in Aracruz may be lower than originally stated, this decline isn't expected to fully offset the additional leverage that is expected to result from the unwinding of Aracruz's current derivative position.
VCP announced on Sept. 15, 2008, that its controlling shareholder, Votorantim Industrial S.A. (Voto), had reached an agreement with Arainvest (which in turn is controlled by the Safra group), to establish a holding company to consolidate their joint investments in VCP and Aracruz. Voto's contribution would be its 52.5% economic interest in VCP (including 100% of the voting shares), while Arainvest would contribute its 28% voting stake in Aracruz and its 14.8% stake in Aracruz's preferred stock. As part of this agreement, Arainvest would also pay Voto BRL530 million so that they both would have a 50% voting interest in the new holding company and VCP would pay BRL2.710 billion to Arapar, a company associated with the Erling Lorentzen, to increase its voting stake in Aracruz to 56% from 28%. These transactions were expected to occur on Oct. 6, 2008 and VCP and Aracruz were expected to be merged into one company shortly thereafter.
A merged VCP and Aracruz would be a leading global producer of market pulp, with estimated sales of about 4.5 million tons of market pulp, in addition to sales of about 400,000 tons of paper. With operations based in Brazil, one of the world's lowest cost locations for market pulp productions, the company would enjoy both economies of scale and a cost structure that is unrivaled in the market. Combined, VCP and Aracruz have projects that would that would increase their joint market pulp production capacity by an additional 7.5 million tons per year by the end of 2015. The merger of VCP and Aracruz would allow these projects to proceed in accordance with market conditions, which should ensure that the company's profitability margins remain among the highest in the industry.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
Joe Bormann, CFA, +1-312-368-3349 (Chicago)
Gisele Paolino, +55-21-4503-2600 (Rio de Janeiro)
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
