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 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 28, 2020 1 Empresas CMPC S.A. 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. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 28, 2020 2 Empresas CMPC S.A. 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 Brazil, 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. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 28, 2020 3 Empresas CMPC S.A. 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. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 28, 2020 4 Empresas CMPC S.A. 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. • Chile'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 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 28, 2020 5 Empresas CMPC S.A. 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).