Adding yet more grist to the Latin American mill, Aracruz Celulose roadshowed a 144A/Reg S private placement last week via Citigroup. The Brazilian wood-pulp producer is out with a seven-year legal final deal for up to US$400 million through vehicle Arcel Finance Limited, according to sources. Investors have packed in roughly US$947 million of Latin ABS so far in the third quarter, with US$247 million of that coming from exporters like Aracruz. Yet the word "glut" is not on anyone's lips. "We're still looking, and with the tightening in Brazil, we're looking for something with a little extra," said one investor keen on the Aracruz transaction.
Recent blemishes on the corporate's credit standing do not appear to have provoked trouble for the structured issue. In mid-July, Moody's Investors Service dropped the outlook on its Baa3' global-scale local currency rating to negative from stable. While the scale of its bleached pulp operation has helped make the company the world's most efficient producer of the eucalyptus variety, its ruthless focus on a single commodity has reinforced a vulnerability to price swings. "The company's reliance on uncommitted credit lines and continued heavy concentration of production at a single site also restrain ratings," said Moody's in a report on the corporate.
Earlier in July, Standard & Poor's slapped a negative CreditWatch on its BBB-' local currency rating for Aracruz, following news of the company's purchase of pulp peer Riocell, estimated at US$570 million. The agency dropped the CreditWatch and confirmed the rating after determining that the acquisition would not push financial ratios into junk-bond territory.
Relative indifference to these events is grounded in a seasoned structure and hearty appetite for future flow assets out of Brazil. "These deals are well received because they're well structured," said one investor. Arcel Finance issued once before, in February 2002, with a US$250 million seven-year deal pricing at 5.984%. That came well ahead of the paralysis that hit Brazilian issuance leading up to elections in October.
Moody's has rated the current deal Baa3.' Fitch Ratings and S&P are giving ratings of BBB' and BBB-', according to a source on the transaction. Proceeds for the transaction will be plowed into the purchase of Riocell, helping wean the company off the short-term debt that was a necessity in the liquidity crunch of last year.
Greenberg Traurig is legal counsel for the issuer. Sidley Austin Brown & Wood is advising the lead on the cross-border side, while Levy & Salomao is Citigroup's domestic counsel.
Collateral is comprised of current and future U.S. dollar receivables generated by exports of bleached eucalyptus kraft market pulp (BEKP). Under the terms, Aracruz has pledged to sell its unit Aracruz Trading at least 80% of BEKP exports and non-Brazilian customers of Aracruz Trading will be handed irrevocable instructions to make payments into an account, which will pay noteholders. The true sale of receivables is between Aracruz Trading and Arcel Finance and is governed by Panamanian law - the jurisdiction of the former entity - and Cayman Island law.
The percentage of exports funneled into the structure has been cut from 95% in the first issue due to the anticipated boost in production from Riocell, which has an annual capacity of 400,000 metric tons. Its addition brings the company's total capacity to 2.4 million metric tons.
In 2002, Aracruz posted sales of over US$700 million on a total output of 1.6 million metric tons of BEKP.
While Aracruz clears the path for issuance, one of its shareholders is reportedly reviving a deal of its own, but sources indicate it may take longer than expected. According to the Web site of Brazilian publication Valor Economico, Votorantim Celulose y Papel (VCP), a 28% shareholder in Aracruz, is gearing up for an issue of US$200 million in September via joint leads ABN Amro and Merrill Lynch. But at least one source close to the transaction said nothing is cooking. The VCP deal has been on the backburner for some time, sources said.
Another DPR deal on the horizon
Elsewhere in the Brazilian market, Banco Bradesco is preparing a deal backed by diversified payment rights, the assets of choice for the country's banking sector. Heard at US$200 million to US$400 million, the transaction is expected out shortly, according to a source familiar with the issuer. ABN Amro is lead. Dewey Ballantine is counsel for the issuer, and Mayer Brown Rowe and Maw is advising the lead. Some US$545 million has been issued so far this in year in Brazilian DPR deals.