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Investing.com -- S&P Global Ratings has revised its outlook for Chilean pulp and paper producer Empresas CMPC S.A. (CMPC) to negative from stable, citing a slower-than-expected rate of deleveraging. The ’BBB’ long-term issuer credit rating, however, remains affirmed.
The revision comes in the wake of a weak 2023 for CMPC and a slower pace of debt reduction than anticipated. The ratings agency now sees tighter rating headroom amid a low pulp price scenario in 2025. S&P Global Ratings expects CMPC’s debt to EBITDA ratio to remain above 3.0x and funds from operations (FFO) to debt ratio to be below 30% in 2025, unless the company takes measures to reduce its leverage.
The negative outlook reflects a slightly weaker than expected performance over the past two years, which has kept the company’s leverage above S&P’s downside triggers. Despite an improvement in EBITDA and cash flow during 2024, CMPC’s deleveraging has lagged behind expectations.
In 2024, CMPC reduced its S&P Global Ratings-adjusted debt to EBITDA ratio to 3.4x from 3.9x in 2023, but it remained above the agency’s 3.0x downgrade trigger. Given the forecast of weaker pulp prices in 2025, the agency sees little room for significant deleveraging.
S&P Global Ratings anticipates an average pulp price drop of 10%-20% in 2025, depending on the grade and region, due to an expected pulp oversupply until about mid-2025 amid the ramp up of the Cerrado and Liansheng mills.
CMPC’s EBITDA and leverage are expected to remain almost flat during 2025. While the drop in pulp prices could be largely offset by stronger volumes and slightly lower costs, the ratings agency expects a stable contribution from the Softys and bio-packaging businesses.
Although cash flow should improve amid lower dividends and slightly lower investments, these improvements may not be enough to significantly reduce leverage. In S&P’s base case, CMPC’s debt to EBITDA is about 3.2x and FFO to debt about 22% in 2025.
The agency believes that CMPC’s tissue business will continue to partially offset high volatility in the pulp business. Amid organic and inorganic growth and efforts to restructure the tissue and personal care business, EBITDA from the segment increased to about $500 million in 2024 and 2023 from the historical average of $200 million in the previous five years.
S&P Global Ratings believes that CMPC’s management is prudent, as illustrated during periods of higher uncertainty and challenging market circumstances. The company has a track record of conservative financial policy, which could help it bring leverage within rating thresholds.
The ratings agency could lower the ratings in the next 12 months if the company does not manage to improve cash flow, or if pulp prices remain lower for longer. A downgrade would be consistent with debt to EBITDA consistently above 3.0x and FFO to net debt below 30% on a three-to-five year moving average.
On the other hand, the outlook could be revised to stable in the next 12 to 24 months if the company improves its operating performance or cashflow generation, or takes countercyclical measures and aligns its credit metrics with the current rating category. This would be consistent with debt to EBITDA below 3.0x and FFO to net debt closer to 30% on a three- to five-year moving average.
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