Empresas CMPC S.A.

Primary Credit Analyst: Amalia E Bulacios, Buenos Aires (54) 11-4891-2141; [email protected]

Table Of Contents

Credit Highlights

Outlook

Our Base-Case Scenario

Company Description

Business Risk

Financial Risk

Liquidity

Covenant Analysis

Environmental, Social, And Governance

Issue Ratings - Subordination Risk Analysis

Reconciliation

Ratings Score Snapshot

Related Criteria

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Business Risk: SATISFACTORY Issuer Credit Rating Vulnerable Excellent

bbb- bbb- bbb- Foreign Currency Rating

Financial Risk: SIGNIFICANT BBB-/Stable/--

Highly leveraged Minimal

Anchor Modifiers Group/Gov't

Credit Highlights

Overview

Key strengths Key risks Large global pulp producer with 4.1 million tons per year. Volatile operating results due to exposure to pulp prices. Low-cost producer thanks to productive land and efficient industrial facilities. Capital-intensive industry. Diversification of the portfolio into more value-added products with a dominant position in South America. Commitment to keep the leverage metric below 3.5x.

The spread of COVID-19 will curtail pulp prices in 2020. Pulp prices dipped in 2019 after reaching record-high levels in 2018, and we expect average prices to be 13%-16% lower in 2020. Although at the start of the year, prices were below cash cost of less efficient producers in China (main market for the group) and demand for tissue and certain types of packaging has remained strong so far, demand for graphic paper has collapsed and the world is entering a deep recession, which is generating uncertainty for paper producers. So far, buyers have remained somewhat reluctant to accept price hikes, and they have been so far minor and inconsistent across pulp grades and geographies. We believe that pulp producers will struggle to pass significant price hikes until the fourth quarter. Under this scenario, we have lowered our average pulp benchmark prices for 2020 and 2021 to $490 per ton and $600 per ton, respectively, for bleached hardwood kraft pulp delivered in China. Also, our forecast calls for bleached softwood kraft pulp delivered in Europe (CIF) to be $840 per ton in 2020 and $890 in 2021. This would reduce Empresas CMPC S.A.'s (CMPC's) EBITDA to about $1.0 billion in 2020 from $1.16 billion in 2019 and $1.84 billion in 2018. However, we assume that the increase in average benchmark prices in 2021 will raise the company's EBITDA to $1.2 billion - $1.3 billion.

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Chart 1

Despite some exchange-rate volatility, we expect Softy's EBITDA growth to be sound but not enough to offset downturns in the pulp business. CMPC has a leading position in the tissue paper market and strong presence in the sanitary products market in several Latin American countries. Demand for tissue products has soared amid the spread of COVID-19. Although this might be temporary, we expect the company to report strong volume growth for this segment in 2020 despite recession in Latin America. This, coupled with first full year of integration of Serrados e Pasta e Celulose Ltda (SEPAC) in , should raise tissue and sanitary products volumes about 12% and 8%-10%, respectively, in 2020. The mitigating factor is a sharp depreciation of currencies in all countries where Softy's operates. Yet its EBITDA should be up 25%-30% in 2020 amid stronger margins. Still, while we expect CMPC to continue expanding its capacity at its tissue and packaging segments in the next couple of years, the pulp division will continue contributing 70%-75% of consolidated EBITDA.

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Chart 2

No major investments will translate into positive free cash flows and the company will keep leverage in line with its financial policy and current rating threshold. The company's deleveraging in past years and moderate capital expenditure (capex) plans help compensate for lower pulp prices. Between 2016 and 2019, CMPC reduced its gross debt by about $330 million. Furthermore, the company's investments in the next two years will be for minor expansions of value-added products (where costs are much smaller than in pulp), some streamlining and greater operating efficiencies, and preparing the forest assets for future pulp growth. Therefore, we expect capital spending to remain at $400 million - $500 million annually in 2020 and 2021. For this reason and despite the much lower pulp prices, we expect leverage metrics to remain in line with the current rating and the company's financial policy. We expect debt to EBITDA to be flat in 2020 at 3.0x-3.2x and slip to about 2.5x in 2021 amid some recovery in pulp prices.

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Outlook: Stable

The stable outlook reflects our view that, despite lower pulp prices, CMPC's leverage will remain consistent with current rating level in the next two years. We expect leverage to remain relatively flat in 2020 and start to fall gradually in 2021. The stable outlook is consistent with funds from operations (FFO) to debt of 24%-26% in 2020 and close to 30% in 2021, and debt to EBITDA of 3.0x-3.2x in 2020 and about 2.5x in 2021. The outlook also reflects that even under volatile pulp prices, we expect CMPC to remain committed to its financial policy, which is in line with an investment-grade rating.

Downside scenario

We could downgrade CMPC if it encounters considerable operational problems or if prices decline steeper than expected. Such factors can result in debt to EBITDA persistently above 3.5x and FFO to debt below 20%. That would happen, for instance, if EBITDA margins drop below 18%, which would be consistent with a fall in average realized pulp prices of less than $500 per ton, and the company increases its capex about $200 million annually against our base-case assumptions.

Upside scenario

The pulp market's volatile nature somewhat constrains CMPC's business. An upgrade is dependent on the company's ability to maintain some cushion in its debt levels that would allow it to absorb significant pulp-price volatility without hurting its leverage significantly. An upgrade would be consistent with maintaining debt to EBITDA below 3.0x throughout the cycle and high investment periods.

Our Base-Case Scenario

Assumptions Key Metrics

• Average realized pulp prices of $505-$510 per ton in 2020 and $580-$600 in 2021. 2019a 2020f 2021f EBITDA margin (%) 19.8 19-20 20-22 • Steady BEKP volumes in 2020 and 2021, close to 3 Debt/EBITDA (x) 3.2 3.0-3.2 ~2.5 million tons, and BSKP volumes, of about 700 FFO/debt (%) 16 24-26 ~30 million tons, for the next three years amid no expectations for additional capacity. a—Actual. f--Forecast. • 's annual GDP to decrease around 3.9% in 2020 but to grow 4.6% in 2021. GDP across Latin America to drop 5.0%-5.5% in 2020, but grow 3%-4% in 2021. • Considerable depreciation--above inflation rates--of some Latin American currencies in 2020, which will result in lower average prices for Softy's. But we

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expect appreciations or depreciation in 2021 below inflation levels in most countries of the region, which should also support revenue growth for the tissue segment for that year. • A fall of about 2% in paper volumes in 2020 because of COVID's impact on the economy and to increase in the next two years because of the ramp-up of the Maule mill and improving boxboard demand amid economic recovery in most countries in the region. • Tissue products to be more resilient to economic volatility, with volumes growing 10%-12% in 2020, because of additional capacities stemming from the integration of SEPAC in Brazil, and growth of 3%-4% in 2021. • Capex of about $400 million in 2020 and $500 million in 2021 including annual maintenance capex of $260 million - $280 million, some minor investments for other tissue projects, and efficiency projects, and streamlining pulp projects. We believe capex could somewhat deviate from our assumptions in next two years depending on opportunities for land acquisitions to expand the forest asset base. • A final dividend distribution over 2019 results for about $15 million and no provisory dividend in 2020 according to the revised 30% of net income dividend policy. We assume the company would resume a 40% distribution in 2021.

Base-case projections Despite slightly lower EBITDA, we expect stronger cash flows in 2020, restraining leverage from increasing. Lower average pulp prices will continue to dent EBITDA in 2020, yet much lower taxes, dividends, and investments should shore up cash flows. CMPC devoted $763 million last year for capex and acquisitions, and we assume this number will drop to about--or even below--$400 million in 2020.

We expect operational recovery in 2021 amid higher pulp prices. We expect average realized pulp prices to rise 15%-18% in 2021, strengthening top-line growth and margins. Coupled with gradual internal growth in the packaging and tissue business, we expect EBITDA to increase about 20% and the leverage metric to slip to about 2.5x.

Company Description

CMPC is engaged in the forest products business. With operations in eight countries and selling to more than 30,000 customers in more than 45 countries, the company operates in three segments: pulp, biopackaging, and tissue (under

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 28, 2020 6 Empresas CMPC S.A. the Softy's brand). CMPC is one of the world's largest pulp producers, and a leading tissue and sanitary products producer in several Latin American countries. The company benefits from a substantial land base which encompasses more than 1.1 million hectares, 730,000 of which were planted as of the end of 2019. About 65% of CMPC's productive land is in Chile, while the rest is in Brazil (26%) and (9%). The Matte family, owner of one of Chile's leading economic groups, controls the company through a 56% stake in the capital.

Chart 3

Business Risk: Satisfactory

CMPC is one the largest pulp producers in the world with a total capacity of 4.1 million tons per year in strategically located mills in Chile and Brazil. Additionally, CMPC has diversified into more value-added products, such as paper and tissue with strong presence across Latin America. The company has a very competitive cost structure due to its access to highly productive forests in Chile and Brazil, its strategically located facilities, and integration into wood and energy production. Climate conditions in Chile and Brazil favor the shortest harvest cycles for radiate pine and eucalyptus, respectively, in the world. These conditions allow CMPC to achieve average cash costs (delivered in China) at around $300 per ton for BEKP and roughly above $400 per ton for BSKP, which is a clear competitive advantage against any other pulp producer outside Brazil or Chile.

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CMPC also benefits from dominant market shares and well-known brands in the tissue segment in several Latin American countries. These include Chile (68%), (52%), Argentina (40%), and (84%), and rising shares in Brazil (20%), (13%), and (11%). The wide use of the company's flagship 'Elite' brand, along with its tissue producing facilities' locations near main consumption markets, supports these market shares. We believe that these strengths will continue to allow CMPC to generate robust operating cash flows through the cycle despite the inherent volatility of pulp prices and consumer spending cycles.

Peer comparison Table 1 Empresas CMPC S.A.--Peer Comparison

Industry sector: Paper/forest products

Empresas CMPC S.A. Celulosa Arauco y Constitucion S.A. Klabin S.A. Suzano S.A. Ratings as of April 23, 2020 (BBB-)/(Stable)/-- BBB-/Negative/-- BB+/Stable/-- BBB-/Negative/-- --Fiscal year ended Dec. 31, 2019--

(Mil. $) Revenue 5,670.3 5,329.2 2,555.4 6,471.5 EBITDA 1,122.2 1,150.4 929.4 2,648.3 Funds from operations (FFO) 572.8 529.8 634.5 1,809.0 Interest expense 199.1 253.4 369.8 847.7 Cash interest paid 146.4 290.8 294.8 741.9 Cash flow from operations 500.4 424.7 753.9 1,883.8 Capital expenditure 248.1 1,223.4 640.4 1,210.1 Free operating cash flow (FOCF) 252.4 (798.7) 113.5 673.7 Discretionary cash flow (DCF) 49.5 (980.8) (126.7) 522.6 Cash and short-term investments 619.6 1,560.0 2,420.8 2,338.5 Debt 3,579.6 4,676.9 3,696.1 14,751.6 Equity 8,135.6 7,369.4 1,617.4 4,499.9

Adjusted ratios EBITDA margin (%) 19.8 21.6 36.4 40.9 Return on capital (%) 5.3 5.5 12.9 6.0 EBITDA interest coverage (x) 5.6 4.5 2.5 3.1 FFO cash interest coverage (x) 4.9 2.8 3.2 3.4 Debt/EBITDA (x) 3.2 4.1 4.0 5.6 FFO/debt (%) 16.0 11.3 17.2 12.3 Cash flow from operations/debt (%) 14.0 9.1 20.4 12.8 FOCF/debt (%) 7.1 (17.1) 3.1 4.6 DCF/debt (%) 1.4 (21.0) (3.4) 3.5

We consider other Chilean and Brazilian pulp producers as close peers of CMPC, given that they benefit from access to superior natural resources. Compared with peers, CMPC has sizable production capacity (although considerably smaller than that of Suzano S.A.) and wider product diversification. Although peers such as Celulosa Arauco y Constitucion S.A. and Klabin S.A. have diversified into panels and paper, respectively, we believe CMPC's portfolio of

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Brazilian peers generate stronger EBITDA margins than CMPC due to several factors. On one hand, CMPC has higher pulp cash costs, which is mainly due to the higher exposure to softwood, which is costlier to produce than hardwood. CMPC's pulp mills are older (except for Guaiba) than those of the Brazilian players, which also results in slightly higher cash costs and maintenance capex. CMPC's lower EBITDA margins than those of the Brazilian peers also stem from a different business mix with integration towards lower-margin value added products.

Chart 4

Financial Risk: Significant

CMPC generates solid, but volatile, operating cash flows due to its reliance on pulp prices and significant investments needs, which from time to time result in free cash shortfalls. The sharp downturn in the pulp market since 2019 has prevented the company from reducing debt substantially, yet the absence of major capex plans will allow CMPC to maintain a healthy balance sheet and leverage in line with its financial policy (maintaining debt to EBITDA at 2.5x-3.5x) and its rating. We expect the company to resume deleveraging in 2021, but keep in mind that investments could be larger than in our base-case scenario if leverage falls significantly below the 2.5x floor in its financial policy.

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Chart 5

Financial summary Table 2 Empresas CMPC S.A.--Financial Summary

Industry sector: Paper/forest products --Fiscal year ended Dec. 31--

2019 2018 2017 2016 2015

(Mil. $) Revenue 5670.3 6274.5 5143.1 4865.7 4841.1 EBITDA 1122.2 1835.7 1020.9 998.6 1058.2 Funds from operations (FFO) 572.8 1430.8 733.4 623.5 753.1 Interest expense 199.1 231.1 232.1 225.9 199.9 Cash interest paid 146.4 176.5 218.2 200.3 188.0 Cash flow from operations 500.4 870.5 905.9 571.9 692.3 Capital expenditure 248.1 294.9 403.5 439.8 722.9 Free operating cash flow (FOCF) 252.4 575.5 502.4 132.1 (30.6) Discretionary cash flow (DCF) 49.5 456.6 497.6 95.8 (60.6) Cash and short-term investments 619.6 978.9 843.9 629.2 584.8 Gross available cash 619.6 978.9 843.9 629.2 584.8 Debt 3579.6 3144.8 3473.6 3854.4 3811.2 Equity 8135.6 8244.0 8084.5 7976.4 7927.9

Adjusted ratios EBITDA margin (%) 19.8 29.3 19.8 20.5 21.9 Return on capital (%) 5.3 11.9 4.8 4.6 5.7

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Table 2 Empresas CMPC S.A.--Financial Summary (cont.)

Industry sector: Paper/forest products --Fiscal year ended Dec. 31--

2019 2018 2017 2016 2015 EBITDA interest coverage (x) 5.6 7.9 4.4 4.4 5.3 FFO cash interest coverage (x) 4.9 9.1 4.4 4.1 5.0 Debt/EBITDA (x) 3.2 1.7 3.4 3.9 3.6 FFO/debt (%) 16.0 45.5 21.1 16.2 19.8 Cash flow from operations/debt (%) 14.0 27.7 26.1 14.8 18.2 FOCF/debt (%) 7.1 18.3 14.5 3.4 (0.8) DCF/debt (%) 1.4 14.5 14.3 2.5 (1.6)

Liquidity: Strong

We view CMPC's liquidity position as strong. Although the company's cash position was tighter at the end of 2019, solid cash FFO, the $500 million issuance in international markets in January 2020, and tapping the $400 million revolving credit facility ensure that CMPC will comfortably cover liquidity needs in the next 12 months. We expect source of funds to exceed uses by more than 50%. We also incorporate in our liquidity analysis CMPC's proven ability to tap international and domestic debt markets for financing, solid relationship with banks, and adequate financial flexibility, given the low level of debt maturities in the next 24 months. We also believe CMPC's management is prudent, as seen in lower capex, postponed dividend payments, and working capital efforts during cycle downturns. Finally, we consider the company has the ability to withstand high-impact, low-probability events without the need of refinancing, given that we believe CMPC could again postpone dividends or capex.

Principal Liquidity Sources Principal Liquidity Uses

• Cash position of around $1.26 billion as of March 31, • Debt maturities of about $770 million as of March 2020; and 31, 2020; • Cash FFO of $800 million - $850 million in the next • Capex of $450 million - $500 million in next 12 12 months. months; and • Dividends of $16.5 million, including final dividend under new dividend policy of 30% of net income, and no provisory dividend for this year.

Debt maturities As of December 2019, CMPC's debt maturities were as follows:

• 2020: $511 million

• 2021: $187 million

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• 2022: $648 million

Covenant Analysis

Compliance expectations Inversiones CMPC S.A. (the company's finance arm) is subject to financial covenants on some bank loans and domestic issuances. As of March 31, 2020, the company was in full compliance with those covenants, and we expect it to remain so. Based on our forecasts, we expect comfortable covenant cushion for the next two years: a 40%-50% headroom for the interest coverage covenant and a 60%-100% headroom for the debt-to-equity one.

Requirements Covenant restriction on certain obligations include limitation of:

• Debt to equity of maximum of 0.8x;

• EBITDA and dividends received and interest income/interest expenses of at least 3.25x;

• Equity greater than CLF71.6 billion; and

• Fixed and biological assets: the company is subject to maintain at least 70% of its fixed and biological assets in the main sectors it operates.

Environmental, Social, And Governance

We view CMPC's exposure to environmental risks as fairly in line with the . Favorable climate conditions in Chile and Brazil support its high harvesting rates and above-average profitability. On the other hand, summer wildfires are frequent in Chile and have caused meaningful damage in the past. In 2017, a fire destroyed nearly 4% of CMPC's forest assets in Chile. That didn't lead to a rating change, but remains an environmental risk that we're monitoring. The company manages its forest base in a sustainable manner, and all its forest plantations in Chile and Brazil are certified by the Program for the Endorsement of Forest Certification (PEFC) and Forest Stewardship Council (FSC; a certification from the leading independent third-party certifiers for sustainable forest management). CMPC also generates renewable energy from biomass, achieving approximately 65% in energy self-sufficiency in 2019. We view CMPC's management and governance as fair. In 2017, after publicly admitting for fixing the price of tissue paper with another player between 2001 and 2011, the company had to make a restitution of $150 million to Chilean consumers and will have to pay a $15 million fine. Although this highlighted shortcomings in its internal controls and governance, these expenses had a limited impact on liquidity and credit metrics. CMPC has since replaced top-level executives and implemented several measures in line with guidelines provided by the Free Competition Defense Court.

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Issue Ratings - Subordination Risk Analysis

Capital structure As of March 2020, CMPC's capital structure consisted of almost $3.3 billion in senior unsecured bonds, issued by its non-operating financial vehicle, Inversiones CMPC, and which CMPC guarantees, and about $1.2 billion in bank loans and finance lease obligations, of which $500 million are also at the level of Inversiones CMPC and the remainder at the level of other operating subsidiaries.

Analytical conclusions We don't believe that investors in the senior unsecured notes face a significant disadvantage as creditors of the group's financing vehicle, because CMPC unconditionally guarantees this debt, and thus ranks pari passu to all of the parent's current and future senior unsecured debt. Furthermore, we don't believe there are material financial obligations that would rank ahead of CMPC's unsecured debt by way of structural or contractual subordination in a default scenario. CMPC holds minimal secured obligations, and debt at the level of its operating subsidiaries is less than 25% of total debt.

Reconciliation

Table 3 Empresas CMPC S.A.--Reconciliation Of Reported Amounts With S&P Global Ratings' Adjusted Amounts --Fiscal year ended Dec. 31, 2019--

Empresas CMPC S.A. reported amounts (Mil. $)

S&P Global Cash flow Shareholders' Operating Interest Ratings' adjusted from Debt equity EBITDA income expense EBITDA operations Reported 3945.0 8133.3 893.8 364.6 195.4 1122.2 646.9

S&P Global Ratings' adjustments Cash taxes paid ------(403.0) -- Cash interest paid ------(146.4) -- Reported lease liabilities 191.7 ------Postretirement benefit 62.5 -- 8.5 8.5 3.7 -- -- obligations/deferred compensation Accessible cash and liquid (619.6) ------investments Nonoperating income ------20.7 ------(expense) Reclassification of interest and ------(146.4) dividend cash flows Noncontrolling -- 2.3 ------interest/minority interest COGS: Valuation -- -- 322.9 322.9 ------gains/(losses) EBITDA: Gain/(loss) on -- -- (0.2) (0.2) ------disposals of PP&E

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Table 3 Empresas CMPC S.A.--Reconciliation Of Reported Amounts With S&P Global Ratings' Adjusted Amounts (cont.) EBITDA: Valuation -- -- (118.2) (118.2) ------gains/(losses) EBITDA: Other -- -- 15.5 15.5 ------Total adjustments (365.4) 2.3 228.4 249.1 3.7 (549.4) (146.4)

S&P Global Ratings' adjusted amounts

Cash flow Interest Funds from from Debt Equity EBITDA EBIT expense operations operations Adjusted 3579.6 8135.6 1122.2 613.8 199.1 572.8 500.4

COGS--Cost of goods sold.

Ratings Score Snapshot

Issuer Credit Rating Foreign Currency: BBB-/Stable/--

Business risk: Satisfactory • Country risk: Intermediate • Industry risk: Moderately high • Competitive position: Satisfactory

Financial risk: Significant • Cash flow/leverage: Significant

Anchor: bbb-

Modifiers • Diversification/portfolio effect: Neutral (no impact) • Capital structure: Neutral (no impact) • Financial policy: Neutral (no impact) • Liquidity: Strong (no impact) • Management and governance: Fair (no impact) • Comparable rating analysis: Neutral (no impact)

Related Criteria

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Business And Financial Risk Matrix

Financial Risk Profile Business Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb

Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Weak bb+ bb+ bb bb- b+ b/b- Vulnerable bb- bb- bb-/b+ b+ b b-

Ratings Detail (As Of May 28, 2020)* Empresas CMPC S.A. Issuer Credit Rating Foreign Currency BBB-/Stable/-- Issuer Credit Ratings History 23-Mar-2018 Foreign Currency BBB-/Stable/-- 11-Aug-2017 BBB-/Negative/-- 24-Feb-2014 BBB-/Stable/-- *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.

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