Flash Fixed Income Report /

Chile: Celulosa Arauco set to issue despite political turmoil

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    24 October 2019
    Published by

    Despite the ongoing political turmoil in Chile, Celulosa Arauco y Consstitucion, S.A. (CELARA), one of the world's leading producers of pulp and wood panels (rated Baa3/BBB-/BBB) is set to issue two new "sustainability bonds with 10-year (29 January 2030) and 30-year maturities (29 January 2050), respectively, perhaps as soon as today. 

    According to Bloomberg, the proceeds will be used to "finance and refinance, in whole or in part, Eligible Projects of the issuer or any of the issuer's subsidiaries and/or affiliates, in alignment with the four core components of the Green Bond Principles", specifically to:

    1. Finance part of the proposed modernisation and expansion of the company's Arauco pulp mill in the Bío Bío region of Chile (MAPA project);
    2. Pay the purchase price to holders of the company's US$133.909mn (out of an original issue for US$395.786mn) 5.0% bonds due 21 January 2021 and its US$253.311mn (out of an originally issued amount of US$497.456mn) 4.75% bonds due 11 January 2022 that are validly tendered and accepted to be purchased by the issuer pursuant to the terms of the cash tender offers being concurrently conducted by the issuer; and
    3. For other capital management activities and general corporate purposes.

    The company's US$133.909mn 5.0% senior unsecured bonds due 2021 trade at cUS$103.764 (ALLQ) to yield c1.89% (to worst) for a g-spread of 32bps and a z-spread of 19bps;

    Its US$253.311mn, 4.75% senior unsecured bonds due 2022 trade at cUS$104.513 (ALLQ) to yield c2.37% (to worst) for a g-spread of 81bps, and a z-spread of 77bps.

    Initial price guidance (IPG) for the new bonds is:

    • T + 250bps area for the 10-year bonds; and
    • T + 300bps for the 30-year bonds.

    We believe the bonds will price at or close to guidance. Even though these types of bonds are typically well-received by institutional investors, such as local pension funds and "real-money" high-grade funds, the ongoing political noise in Chile could limit the spread tightening from the IPG that usually takes place when order books are robust (as we believe will be the case with these two tranches). 

    Still, we believe the IPG makes these bonds attractive. That said, the characteristics of the potential investor pool could mean that secondary trading will be somewhat light – in our view, initial buyers will be the types that hold to maturity.