Fitch Takes Rating Actions on Votorantim Celulose e Papel (VCP) and Aracruz Celulose

Fitch Ratings has downgraded the Foreign currency and local currency Issuer Default Ratings (IDR) of Votorantim Celulose e Papel (VCP) as follows:

--IDR to 'BB' from 'BB+';

--National Scale Rating to 'A+ (bra)' from 'AA- (bra)'.

Fitch has simultaneously upgraded the following ratings of Aracruz Celulose S.A. (Aracruz):

--Foreign and local currency IDR to 'BB' from 'BB-';

--National Scale Rating to 'A+ (bra)' from 'A (bra)'.

The Rating Outlook for both VCP and Aracruz is Stable.

Rating Actions Reflect Credit Convergence:

VCP and Aracruz's respective ratings of 'BB' and 'A+ (bra)' reflect the linkage of the credit quality of these two companies during the past nine months as a result of numerous transactions that have resulted in VCP increasing its ownership of Aracruz's voting shares to 99.6% from 28%. By the end of 2009, Aracruz is expected to be merged into VCP, and the company will be renamed Fibria S.A. It will have only one class of shares and will be jointly controlled by Banco Nacional de Desenvolvimento Economico e Social Participacoes S.A. (BNDESPar) and Votorantim Industrial S.A (VID) with stakes of 33.8% and 29.3%, respectively.

Leverage to Remain High through 2011:

VCP and Aracruz had a combined net debt of USD5.4 billion at the end of 2008, an increase from USD2.2 billion at the end of 2007. The increase was due to USD2.1 billion of derivative losses at Aracruz during 2008 and about USD 1.4 billion of capital expenditures. The companies' combined debt levels continued to climb during 2009 as VCP increased its ownership stake in Aracruz to BRL5.6 billion. Steps taken by VCP and Aracruz during 2009 have only partially offset the increase in debt. They include the issuance of BRL3 billion of cash equity by VCP and the sale by Aracruz of its Guaiba unit for USD1.430 billion, of which USD 1 billion will be received in 2009 and used to pay down debt.

The combined company's EBITDA is expected to fall to about USD900 million during 2009 from approximately USD1.1 billion during 2008 due to the sharp decline in pulp prices during the first half of 2009. As a result, Fitch expects VCP's and Aracruz's combined net debt/EBITDA ratio to be about 6.2 times (x) during 2009, an increase from 5.0x during 2008, and substantially higher than the average ratio of 2.3x between 2005 and 2007. Without the sale of VCP's paper assets during 2010 or substantially higher pulp prices, the combined net leverage of VCP and Aracruz should be about 4.0x during 2010. The decline in leverage during 2010 will be driven by a full year's output of pulp from the company's Tres Lagoas mill, which began operations during the first half of 2009, and the receipt of USD430 million of cash from the sale of Guaiba. Low levels of capital expenses and improving pulp prices should then lower net leverage to about 3.5x during 2011.

Excellent Business Profile:

The ratings of VCP and Aracruz factor in the very strong business position of the combined company. Excluding the Guaiba unit, Fibria will have an annual production capacity of approximately 5.350 million tons of market pulp (nearly twice as much as the second largest company in the industry), and 360,000 tons of paper. Its global market share in hardwood market pulp will be about 20% and its share of the most important subset of this category in terms of future growth, eucalyptus pulp, will be about 35%.

Fibria should have a cash cost of production of about USD200 to USD225 per ton of pulp, which would position it at the lowest end of the cost curve. As a result, the company should continue to generate strong cash flow from operations during the trough in the pulp price cycle. Fibria's competitive advantages are viewed to be sustainable in both the medium and long term. The company's mills are large by industry standards and are among the most modern in the world. On a pro-forma basis, excluding the Guiaba sale, the company has about 600,000 hectares of plantations on the 1.1 million hectares of land it owns. The nearly ideal conditions for growing trees in Brazil make these eucalyptus plantations extremely efficient by global standards and give the company a sustainable advantage in terms of cost of fiber, and transportation costs between forest and mills. The heavy investment in forestry by both VCP and Aracruz during the past five years will ensure a number of new projects for Fibria, allowing it to remain a global leader in market pulp production.

Liquidity Remains Tight but Manageable:

As of June 30, 2008, VCP and Aracruz had USD1.550 billion of combined cash and marketable securities. These two companies face total debt amortizations of USD860 million during the second half of 2009 and USD 2.350 billion during 2010. Of these short-term debt figures, USD1.465 billion is with three shareholder groups - Arapar, Sao Teofilo and Arainvest - which sold 56% of the voting shares of Aracruz to VCP during 2009.

VCP and Aracruz are in the process of raising USD1.750 billion of new debt. The proceeds from these debt instruments, along with the USD1.430 billion of cash to be received from the sale of Guaiba, are expected to be used to pre-pay upcoming maturities as well as nearly two-thirds of the remaining debt associated with Aracruz's derivative losses.

Fitch believes that the combined company has additional financial flexibility even if it is not successful in raising the USD1.750 billion of new debt. This flexibility includes extending the payment schedule with the families associated with Arapar, Sao Teofilo and Arainvest. It is also likely that BNDESPar, a subsidiary of Brazil's development bank BNDES, would provide additional support for Fibria if needed. During 2009, BNDESPar contributed BRL2.4 billion of cash to VCP's capital increase. BNDES is also a key lender to the company and has revised its debt covenants to accommodate the company during this period of high leverage.

Potential Rating or Outlook Drivers:

Factors that could lead to consideration of a Negative Outlook or downgrade include a sharp and continued downturn in pulp prices. VCP and Aracruz's ratings could also be negatively affected by the companies inability to successfully merge into one legal entity, making all unsecured debt pari passu, within the next six months. A class action lawsuit has been filed against Aracruz and some of its current and former directors and officers. A material ruling against Aracruz could also lead to negative rating actions.

Positive rating actions could be driven by higher pulp prices, which could allow the company to deleverage at a pace faster than anticipated. Rating upgrades or revision to a Positive Rating Outlook could also result from the sale of VCP's paper assets or an equity increase.

Additional information is available at 'www.fitchratings.com'.

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