Empresas Copec S.A. And Copec’s Outlooks Revised To Negative On Higher Leverage; ‘BBB’ Ratings Affirmed

• Empresas Copec (E-Copec) has an ambitious investment plan for about $2.7 billion this year and $2.1 billion in 2020.
• Since May 2019, pulp prices have sharply fallen and we only expect modest recovery starting in the fourth quarter of the year. This will take a toll on the group’s EBITDA generation.
• We now expect the company to post adjusted debt-to-EBITDA above 3.0x in 2019 and 2020.
• SAO PAULO (S&P Global Ratings) July 29, 2019–S&P Global Ratings revised its outlook on E-Copec and subsidiary Compañía de Petróleos de Chile Copec S. A. (Copec) to negative from stable and affirmed the ‘BBB’ long-term issuer credit ratings on both companies.
• The negative outlook reflects the one-in-three likelihood of a one-notch downgrade over the next 24 months if E-Copec cannot rapidly reduce leverage once the high investment cycle comes to an end.

The outlook revision reflects higher leverage expectations for the next two years following a more aggressive investment strategy in recent years.

E-Copec (the group) has ambitious investment plans for the next couple of years, especially at its forest products subsidiary, Celulosa Arauco y Constitución (Arauco; BBB-/Stable/–). Arauco is investing in a new pulp mill (Project MAPA) with 1.56 million tons of bleached hardwood pulp capacity for $2.35 billion, to be mostly disbursed during this year and the next. Additionally, through Alxar S.A. (not rated), the group owns 40% of the Mina Justa copper project in Peru. This project will demand about $260 million of direct investment between 2019 and 2020 from E-Copec, while it will raise project finance debt, adding $360 million to the group’s debt. These two large projects add to the already considerable capital expenditures (capex) that the group needs to maintain operations, for some smaller projects, and to pay $160 million for the panel business that Arauco acquired in Mexico.

Furthermore, the fuel and lubricant distribution subsidiary, Copec, which historically has had low leverage and provided some cushion against a more aggressive leverage profile at Arauco, is emerging from a period of acquisitions. Between 2016 and 2018, Copec acquired ExxonMobil Andean Holding LLC (EMal) and Mapco, resulting in a considerable increase in leverage that made its debt-to-EBITDA ratio peak at 3.0x as of March 31, 2019, compared to 1.8x in 2015. We expect Copec’s debt to EBITDA to remain close to 2.8x in 2019 and then near 2.5x in 2020.

We believe the higher capex, depressed operating cash flow generation amid lower pulp prices, and higher leverage at Copec will combine to push E-Copec’s debt to EBITDA to 3.2x-3.4x in 2019 and 2020.