Facing an embarrassment of riches, Brazilian exporters have been eschewing securitization as a financing option. Pulp producer Aracruz Celulose is taking it one step further, aiming to buy back up to $537 million in outstanding secured export notes issued by its securitization vehicle, Arcel Finance, the company said in a filing with the Securities and Exchange Commission.
In the filing, Aracruz said it was targeting $175 million outstanding in 6.361% notes due May 1, 2012, and $362 million in 7.048% notes maturing Sept. 1, 2011. The deals correspond to the outstanding unwrapped tranches issued off Arcel Finance. However, according to a source familiar with the company, Aracruz is just as keen on retiring an Arcel-issued bond wrapped by XLCA that is not mentioned in the filing. Initially sized at $250 million, those notes bear a 5.984% coupon and mature Feb. 1, 2009.
Citigroup arranged the 5.984% wrapped bond and the 7.048% unwrapped notes that closed in late July 2003 for a total of $400 million. JPMorgan Securities led the 6.361% notes, which closed in early May 2004 for $175 million, the same volume as the outstanding amount since amortization isn't due to kick in until June 2006. The same two banks are leading the exchange offer.
While the tender is in cash, the company plans to issue unsecured 10-year bonds that might entice some of the holders of the unwrapped securitized notes, sources said. Along with the tender offer, Aracruz announced its plans to issue a 10-year bond in a note to the SEC. Moody's Investors Service and Standard & Poor's have the same respective grades - Baa3' and BBB-' - on the company's foreign currency ratings and the unwrapped notes, an unusual circumstance that reinforces the idea that investors in the unwrapped paper might be comfortable buying into the new unsecured bond. If they do, that would turn part of the operation into a de-facto swap. It will be a question of pricing.
Fitch Ratings rates the corporate's foreign currency and the wrapped notes four notches apart, at BB-' and BBB,' respectively.
Triple-A paper: Ripe for buyback?
The source added that holders of the wrapped piece would be loath to effectively exchange a triple-A paper for unsecured notes because of the yawning ratings gap. That, he added, could motivate the company to take out more of that issue than the two others, depending on the all-in-cost of the wrapped piece. The wrapped bonds have a call clause allowing Aracruz to buy them back at 25 basis points over comparable Treasurys, said a different source who is close to the deal. If it made sense, the company could do so and bypass a formal tender offer.
An Aracruz official declined to comment on any plans for the wrapped bond. An XLCA official did not return calls as of press time.
The offering price is based on a fixed spread over the market price at 2 p.m. Eastern Standard Time on March 6, of the 4.5% U.S. Treasurys due Feb. 15, 2009. For the notes due in 2012, the spread is 80 basis points over the Treasurys. For the 2011s, the spread is 75 basis points over.
Aracruz isn't the first Brazilian exporter to buy back securitized debt during the current bull run in commodity prices. In September, Petroleos Brasileiros prepaid the roughly $338 million in floating series 2001-A2 and 2001-C, according to a source familiar with the operation. The company has also more recently bought back fixed rate notes 2001-A1 and 2001-B, which amounted to $395 million at issuance, according to sources familiar with the transaction.
Aracruz is the world's largest producer of bleached eucalyptus market pulp, which comprises the collateral for the Arcel-issued notes. The debt service coverage ratio reached a level of over nine times as of January. The DSCR is calculated as the total collections over the maximum (per period) debt service payments of all outstanding series.
Riding high on steep commodity prices, the company's net income hit $341 million in 2005 from $227 million in 2004 and $148 million in 2003.
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