OREANDA-NEWS. Fitch Ratings has assigned Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'B' to Celulosa Argentina S. A. (CASA). The Rating Outlook is Stable. In addition, Fitch has assigned a 'B(EXP)/RR4' long-term rating to the company's proposed senior unsecured debt issuance of USD200 million. The proceeds from the issuance will be used mainly to refinance the company's existing indebtedness as well as general corporate purposes. The notes will rank pari passu in priority of payment with all other CASA senior unsecured debt.

KEY RATING DRIVERS

CASA's ratings reflect the company's position as the largest integrated pulp and paper manufacturer in Argentina. It has the leading market share in printing and writing paper in the country. CASA benefits from restrictions on paper being imported from Brazil. Like other paper producers, CASA is vulnerable to industry cycles.

DOMESTIC MARKET FOCUS

CASA has a 35% and 23% market share, respectively, in coated and uncoated paper in Argentina. Its operations are vertically integrated from forestry to distribution. Given its high cost structure due to its small size, CASA has little flexibility to compete in the export market. As of the nine months ended Feb. 28, 2016, paper comprised 68% of sales, followed by solid wood (10%), packaging and other (9%), tissue (8%), and pulp (5%).

DEPENDENCE ON IMPORT RESTRICTIONS

CASA is small in size compared to its peers in Brazil and Chile. This results in a cost structure that is above average within South America. The company benefits from import tariffs and other agreements, such as a bilateral trade agreement between the governments of Argentina and Brazil that limits Brazilian paper imports and reduces competition in the domestic market. This scenario has increased the premium of local prices over export prices and the share of domestic sales over total sales.

VOLATILE CASH FLOW GENERATION

CASA's small size makes it more vulnerable to industry cycles due to lower economies of scale. The company's operating results are exposed to high levels of volatility in international pulp prices. CASA is also exposed to double-digit inflation in Argentina and other direct and indirect sovereign-related risks, including devaluation and refinancing risks.

MODERATE LEVERAGE

As of Feb. 29, 2016 LTM, the company's total debt-to-adjusted EBITDA ratio was 3.8x and net debt-to-adjusted EBITDA ratio was 3.7x, higher when compared with 2.9x and 2.8x at FYE 2015. While EBITDA improved ARS208 million to ARS691 million at Feb. 29, 2016 LTM, debt increased by ARS1 billion. The increase in debt was related to the depreciation of the Argentine peso as the company's debt in USD-terms declined to USD168 million at Feb. 29, 2016, from USD176 million in FYE2015.

CASA sold its property in Uruguay during April 2016. The company expects to receive USD35 million during FY2017 and USD7 million over the next three years. The company intends to use this cash to purchase a second tissue machine, which should lead to lower levels of leverage.

KEY ASSUMPTIONS

Fitch's key assumptions within our ratings case for the issuer include:

--Revenue growth in line with inflation;

--EBITDA margin approaches 18.5% by 2019;

--Successful bond issuance and company receives proceeds for land sale in Uruguay. Proceeds used towards refinancing existing debt, working capital and general corporate purposes, remaining cash kept on balance sheet.

--Second tissue machine acquired and begins operations in 2019. --Planned maintenance stoppage in FY2017 and FY2019;

--Capex according to company projections;

--Net leverage falls below 2.5x by 2019.

RATING SENSITIVITIES

CASA's ratings could be negatively affected by a combination of the following: a prolonged downturn in pulp and paper prices resulting in a material weakening of CASA's capital structure, or a downgrade of the Argentine sovereign could result in a negative rating action.

An upgrade in the near - to medium-term is unlikely. Increased exports would be viewed favorably.

LIQUIDITY

Fitch expects the company to keep some of the proceeds of the bond issuance as cash on balance sheet, ending the year at around USD13 million. CASA has historically maintained less than USD10 million in cash, given the lack of investment opportunities where a large amount of cash is required, and the economic situation in Argentina. The company reported USD6 million in cash as of the LTM ended Feb. 29, 2016, which was not enough to cover short-term debt of USD76 million. Typical of Argentine corporates, the majority of CASA's debt (51%) is short-term; CASA has long-term relationships with its lenders, and like most Argentine companies in the last decade, has consistently rolled over its short-term debt, as long-term debt has not been readily available.