The downgrade of the corporate family rating reflects Moody's view that CASA ultimately cannot be completely de-linked from the credit quality of the Argentinean government (B3, stable), and thus its ratings need to more closely reflect the risk that they share with the sovereign. The rating action also considers the company's current tight liquidity position, as it faces short-term debt maturities with cash balances likely to remain low and the impact of cost inflation on CASA's margins.
A weaker sovereign has the potential to create a ratings drag, and therefore it is appropriate to limit the extent to which these issuers are rated higher than the sovereign, in line with Moody's Rating Implementation Guidance "How Sovereign Credit Quality May Affect Other Ratings" published on 13 February 2012, and available on www.moodys.com.
"In order to be rated significantly above the sovereign, an issuer needs not only be fundamentally stronger than the sovereign from a credit perspective, but also demonstrate a degree of insulation from the domestic macroeconomic and financial disruption, which generally accompanies a sovereign default," says Veronica Amendola, a Moody's Vice President, Senior Analyst.
"We continue to take into account CASA's market leadership and highly recognized brand name in the domestic pulp and paper markets, with vertically integrated operations. However, we believe de-linking it from the sovereign is not appropriate because of the company's asset concentration in Argentina, with domestic business concentration, banks and counterparties," Amendola adds.
Moody's notes that any downward rating action at the sovereign level would likely result in negative rating actions at CASA, as the agency would seek to maintain the current rating alignment in the absence of a significant change in credit quality at CASA. A potential upgrade is not anticipated in the foreseeable future.
CASA's current liquidity position is tight, with high short-term debt maturities and a sizeable capex plan. For the last twelve months ended in February 2012, CASA had USD 3.7 million of cash and marketable securities and USD 83.9 million of short-term debt. Although CASA has recently entered into an agreement with its main bank lenders that will grant an 18 month grace period on its principal and interest payments, short term debt exposure on CASA's balance sheet is still significant.
The negative outlook on the corporate family ratings reflects weakening operational performance due to the company's exposure to inflation in the local market and sovereign interrelated risks, due to the company's assets concentration in Argentina, with domestic business concentration, banks and counterparties. We believe that the company will stay in compliance with its covenants, given current operating performance.
While unlikely at this juncture, the outlook could be stabilized if Argentina's B3 government bond rating would be upgraded. In addition, the outlook could experience upward pressure from improved and more stable operating margins on a sustained basis. Factors that could result in a positive rating action could include bolstering CASA's liquidity profile, through debt reduction and strong cash flow generation. Quantitatively, upward rating pressure could build if CASA's debt to EBITDA, is sustainable below 3 times and EBITDA to interest above 5 times.
A downgrade in the ratings could result from a deterioration in CASA's sales and margins or from a failure to address near to medium term debt maturities and compliance with its debt covenants. The ratings could be downgraded if CASA's operating performance and liquidity profile persistently weaken. Quantitatively, a downgrade could result from Debt to EBITDA of above 6.5 times and/or EBITDA to Interest of below 1 times, both at the CASA consolidated level.
Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in March 2011 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".
CASA is a pulp, paper and wood product manufacturer, with primary operations in Argentina and Uruguay, with leading local brands and market positions in printing and writing papers, solid wood and plywood products. CASA also exports approximately 27% of revenues to Chile, Brazil and other Latin American countries, and to a lesser extent, the United States, Europe and Asia. For the last twelve months ended in February 2012, CASA's consolidated revenues reached USD 375 million.
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Veronica Amendola Vice President - Senior Analyst Corporate Finance Group Moody'sLatin America, Calificadora de Riesgo Cerrito 1186, 11th fl Buenos Aires C1010AAX Argentina JOURNALISTS: (800) 666 -3506 SUBSCRIBERS: (5411) 3752 2000 Brian Oak MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Latin America, Calificadora de Riesgo Cerrito 1186, 11th fl Buenos Aires C1010AAX Argentina JOURNALISTS: (800) 666 -3506 SUBSCRIBERS: (5411) 3752 2000 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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