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Moody’s : Potential Eldorado sale could transform Latin America’s fragmented pulp sector

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The potential sale of Eldorado Brasil (unrated) to an industry peer could transform Latin America’s fragmented pulp sector, improving the business prospects for any of the region’s four major rated pulp producers, says Moody’s Investors Service in a report.

However, any deal could also strain the credit quality of those companies.

Press reports in Brazil suggest that J&F Investimentos (unrated) is considering selling its stake in hardwood pulp producer Eldorado to another Latin American pulp producer, to help pay a BRL10.3 billion (USD3.2 billion) leniency agreement related to J&F role in bribery and kickback allegations.

"All of Latin America’s large pulp producers have expanded their hardwood pulp capacity significantly since 2012," says Barbara Mattos, a Vice President at Moody’s. "Consolidation of the fragmented global pulp industry would bring more discipline to supply."

Moody’s has analyzed the impact of a hypothetical $1 billion, 100% debt-financed, acquisition of Eldorado on the business and credit ratings of Latin America’s four other rated largest paper and pulp producers, Celulosa Arauco S.A. (Baa3 stable), Empresas CMPC (unrated, parent of Inversiones CMPC S.A., the issuer of the Baa3 stable rated debt), Fibria Celulose (Ba1 negative) or Suzano Papel e Celulose (Ba1 negative).

Under these assumptions, an acquisition would raise leverage metrics for all four issuers to above levels that could raise pressure on their ratings. However, the effect of the purchase on ratings would depend on Moody’s analysis of a number of factors including the deal’s value, its funding structure and payment schedule, the benefits it would bring to the buyer’s business profile, its synergies, and the speed of the deleveraging process.

.For example, for Fibria, the cash and synergies generated by Eldorado would help strengthen its position as the world’s largest market pulp producer, while for Suzano and CMPC the acquisition would make either one the second largest pulp production in the world, after Fibria. For Arauco, buying Eldorado would consolidate its position as the second largest pulp producer globally and it also mean expanding its pulp production into Brazil, where it´s not present yet.