ARAUCO & CONSTITUTION PULP INC | CIK:0001004156 |

 

 

Arauco's financial instruments as of December 31, 2017 and December 31, 2016, are displayed in the table below. Regarding those instruments valued at an amortized cost, as estimation of their fair value is displayed for informational purposes.

 

Financial Instruments		December 2017						December 2016
Thousands of dollars		Carrying amount			Fair Value			Carrying amount			Fair Value
Fair value through profit or loss (held for trading) (1)			74,849			74,849			198,582			198,582
Derivatives			1,679			1,679			3,166			3,166
Mutual funds (2)			73,170			73,170			195,416			195,416
Loans and Accounts Receivables			1,351,712			1,351,712			1,126,182			1,126,182
Cash and cash equivalents (amortized cost)			516,716			516,716			396,837			396,837
Cash			209,185			209,185			149,446			149,446
Time deposits			292,105			292,105			247,391			247,391
Agreements			15,426			15,426			-			-
Accounts Receivable (net)			830,452			830,452			715,883			715,883
Trade and other receivables			709,983			709,983			600,589			600,589
Lease receivable			13,106			13,106			764			764
Other receivables			107,363			107,363			114,530			114,530
Accounts receivable due from related parties			4,544			4,544			13,462			13,462
Other Financial Assets (5)			58,425			58,425			10,903			10,903
Financial liabilities at amortized cost (3)			5,002,072			5,198,654			5,022,725			5,158,789
Bonds issued denominated in U.S. Dollars			2,057,746			2,135,893			2,321,980			2,480,063
Bonds issued denominated in U.F. (4)			1,244,939			1,333,087			1,130,679			1,078,934
Bank Loans in U.S. Dollars			835,099			870,399			891,338			926,070
Bank borrowing denominated in U.S. Dollars			23,358			23,358			23,020			23,020
Financial leasing			112,376			107,363			113,986			108,980
Trade and other payables			717,346			717,346			537,891			537,891
Accounts payable to related parties			11,208			11,208			3,831			3,831
Financial liabilities at fair value through profit or loss			137			137			336			336
Forward			137			137			336			336
Hedging Liabilities			5,256			5,256			87,027			87,027

 

(1)       Assets measured at fair value through profit or loss other than mutual funds classified as cash equivalents, are presented in the line item “other financial assets” in the consolidated statements of financial position.

(2)       Although mutual funds are measured at fair value through profit or loss for purposes of the consolidated statements of financial position mutual funds are classified as “Cash and cash equivalents” due to the are highly liquid short-term investment.

(3)       Financial liabilities measured at amortized cost, other than “Trade and other payables” and derivatives are presented in the consolidated statements of financial position in the line item “Other financial liabilities” as current and non-current based on their maturity.

(4)       The Unidad de Fomento (“U.F.”) is a unit of account that is linked to, and is adjusted daily to reflect changes in the Chilean consumer price index.

(5)       Includes guarantee fund for derivatives which correspond to the collateral under swap agreements.

 

23.2 Fair Value Hierarchy of Financial Assets and Liabilities

 

The assets and liabilities measured at fair value in the consolidated statements of financial position as of December 31, 2017, have been measured based on the valuation methodologies provided in IAS 39. The methodologies applied for each financial instrument are classified according to their hierarchy as follows:

 

- Level 1: Securities or quoted prices in active markets for identical assets and liabilities

 

- Level 2: Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

 

- Level 3: Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).

 

		Fair Value			Fair value
		December 2017			Level 1			Level 2			Level 3
Financial Instruments		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Fair value through profit or loss (held for trading)
Derivatives			1,679						1,679
Mutual Funds			73,170			73,170
Other financial assets			58,425			2,654			55,771
Financial liabilities measured at amortized cost
Bonds issued denominated in U.S. Dollars			2,135,893			2,135,893
Bonds issued denominated in U.F. (4)			1,333,087			1,333,087
Bank loans in U.S. Dollars			870,399						870,399
Bank borrowing denominated in U.S. Dollars			23,358						23,358
Financial leasing			107,363						107,363
Financial liabilities at fair value through profit or loss			137						137
Hedging liabilities			5,256						5,256

 

 

The carrying amount of accounts receivable, cash and cash equivalents (including mutual funds), and other financial assets and liabilities approximate their fair value due to the short-term nature of such instruments.

 

Interest rate and currency swaps are valued under the cash flow discount method at the rate applicable according to the transaction’s risk, using an internal methodology based on the information obtained from Bloomberg. In this particular case, given that cross currency swaps correspond to future flows in UF and future flows in Dollars, Arauco calculates the current value of such flows by using 2 discount curves: the UF zero coupon curve and the Dollar zero coupon.

 

The fair value of the interest rate swap contracts is calculated by reference to the rate differential between the agreed upon rate and the market rate as of the end date of these financial statements.

 

The fair value of the currency forward contracts is calculated by reference to the current forward exchange rates of contracts with similar maturity profiles.

 

The fair value of bonds issued was determined with reference to quoted market prices as they have standard terms and conditions.

 

The fair value of bank borrowings was determined based on discounted cash flow analysis, applying the corresponding discount yield curves to the remaining term to maturity.

 

Disclosures of the fair value of financial liabilities at amortized cost are determined via the use of discounted cash flows, calculated over variables of the observable markets as of the date of informing the consolidated financial statements, and correspond to Level 2 of the fair value hierarchy.

 

The following table sets forth a reconciliation between the financial liabilities and the consolidated statements of financial position as of December 31, 2017 and 2016:

 

		December 2017
Thousands of dollars		Up to 90 days			From 91 days to 1 year			Other current financial liabilities, Total			From 13 months to 5 years			More than 5 years			Other non- current financial liabilities, Total			Total
Bonds obligations			28,013			34,981			62,994			1,054,926			2,184,765			3,239,691			3,302,685
Bank borrowing			110,700			282,172			392,872			327,424			138,161			465,585			858,457
Financial Leasing			9,928			34,413			44,341			68,035			-			68,035			112,376
Swap and Forward			137			-			137			5,256			-			5,256			5,393
Other Financial Liabilities, Total (a)			148,778			351,566			500,344			1,455,641			2,322,926			3,778,567			4,278,911

 

		December 2017
Thousands of dollars		Up to 90 days			From 91 days to 1 year			Total Current			From 13 months to 5 years			More than 5 years			Total non- current			Total
Trades and other payables			717,342			4			717,346			-			-			-			717,346
Accounts payable to related companies			11,208			-			11,208			-			-			-			11,208
Accounts Payable, Total (b)			728,550			4			728,554			-			-			-			728,554
Financial Liabilities, Total (a) + (b)			877,328			351,570			1,228,898			1,455,641			2,322,926			3,778,567			5,007,465

 

		December 2016
Thousands of dollars		Up to 90 days			From 91 days to 1 year			Other current financial liabilities, Total			From 13 months to 5 years			More than 5 years			Other non- current financial liabilities, Total			Total
Bonds obligations			51,874			409,102			460,976			1,233,603			1,758,079			2,991,682			3,452,658
Bank borrowings			134,140			61,483			195,623			626,384			92,351			718,735			914,358
Financial leasing			9,534			30,866			40,400			73,586			-			73,586			113,986
Swap and Forward			453			-			453			86,911			-			86,911			87,364
Other Financial Liabilities, Total (a)			196,001			501,451			697,452			2,020,484			1,850,430			3,870,914			4,568,366

 

		December 2016
Thousands of dollars		Up to 90 days			From 91 days to 1 year			Total Current			From 13 months to 5 years			More than 5 years			Total non- current			Total
Trades and other payables			511,371			26,520			537,891			-			-			-			537,891
Accounts payable to related companies			3,831			-			3,831			-			-			-			3,831
Accounts Payable, Total (b)			515,202			26,520			541,722			-			-			-			541,722
Financial Liabilities, Total (a) + (b)			711,203			527,971			1,239,174			2,020,484			1,850,430			3,870,914			5,110,088

 

Hedging instruments recorded as of December 31, 2017 and 2016 are cash flow hedges. Arauco uses derivatives for hedging purposes, such as cross currency swaps, currency and commodity forwards, interest rate swaps, and options.  Depending on the fair value of each instrument, the position could be either an asset or a liability, and they are listed in the Statements of Financial Position under Other Non-Current Financial Assets or Other Non-current Financial Liabilities, respectively.  The effects for the period are presented under Equity as Other Comprehensive Income or the Statements of Comprehensive Income as Finance Income or Finance Costs, net of differences in exchange rate of the hedged items and the deferred tax.

 

A summary of the derivative financial instruments included in the Statements of Financial Position as of the end of this period, is presented below:

 

Financial Instruments		2017 Fair Value ThU.S.$			2016 Fair Value ThU.S.$
Assets at fair value through profit or loss (held for trading)			1,679			3,166
Derivative-Uruguay (1)			1,672			3,159
Forward-Colombia			7			7
Hedging Assets			55,771			8,658
Derivative-Uruguay (1)			3,037			2,029
Cross Currency Swaps			52,734			6,629
Financial liabilities at fair value through profit or loss			(137)			(336)
Forward-Colombia			(137)			(267)
Derivative-Uruguay (1)			-			(69)
Hedging Liabilities			(5,256)			(87,027)
Cross Currency Swaps			(5,248)			(86,895)
Derivative-Uruguay (1)			(8)			(132)

 

Arauco is exposed to the risk of variability in cash flows from changes in foreign exchange rates and inflation, mainly due to balances of assets denominated in U.S. Dollars and other currencies differente from the functional currency, which causes mismatches that could affect operating results.

 

Below are the cross currency swaps that Arauco has as of December 31, 2017 and 2016 to cover the exposure to the exchange rate risk generated from bonds denominated in U.F.:

 

Bond		Institution		Amount U.S.$		Amount U.F.		Starting date		Ending date		Market Value ThU.S.$ 2017		Market Value ThU.S. 2016
F		Deutsche - U.K.		43,618,307		1,000,000		10-30-2011		10-30-2021		213		(4,703)
F		JP Morgan - N.A.		43,618,307		1,000,000		10-30-2011		10-30-2021		306		(4,584)
F		Deutsche - U.K.		37,977,065		1,000,000		04-30-2014		04-30-2019		6,599		1,782
F		BBVA – Chile		38,426,435		1,000,000		10-30-2014		04-30-2023		5,252		558
F		BBVA – Chile		38,378,440		1,000,000		10-30-2014		04-30-2023		5,550		908
F		Santander - Chile		37,977,065		1,000,000		10-30-2014		04-30-2023		6,051		1,427
F		BCI – Chile		37,621,562		1,000,000		10-30-2014		04-30-2023		6,549		1,954
J		Corpbanca - Chile		42,864,859		1,000,000		09-01-2010		09-01-2020		(292)		(5,505)
J		BBVA – Chile		42,864,859		1,000,000		09-01-2010		09-01-2020		(292)		(5,505)
J		Deutsche - U.K.		42,864,859		1,000,000		09-01-2010		09-01-2020		(356)		(5,590)
J		Santander – Spain		42,873,112		1,000,000		09-01-2010		09-01-2020		(263)		(5,463)
J		BBVA – Chile		42,864,257		1,000,000		09-01-2010		09-01-2020		(152)		(5,318)
P		Corpbanca - Chile		46,474,122		1,000,000		05-15-2012		11-15-2021		(1,775)		(6,355)
P		JP Morgan - N.A.		47,163,640		1,000,000		11-15-2012		11-15-2021		(1,753)		(6,157)
P		BBVA – Chile		42,412,852		1,000,000		11-15-2013		11-15-2023		1,854		(2,548)
P		Santander - Chile		41,752,718		1,000,000		11-15-2013		11-15-2023		2,777		(1,591)
P		Deutsche - U.K.		41,752,718		1,000,000		11-15-2013		11-15-2023		2,800		(1,564)
R		Santander - Chile		128,611,183		3,000,000		10-01-2014		04-01-2024		(365)		(13,815)
R		JP Morgan - U.K.		43,185,224		1,000,000		10-01-2014		04-01-2024		329		(4,039)
R		Corpbanca - Chile		43,277,070		1,000,000		10-01-2014		04-01-2024		327		(4,026)
Q		BCI - Chile		43,185,224		1,000,000		10-01-2014		04-01-2021		1,022		(3,524)
Q		BCI - Chile		43,196,695		1,000,000		10-01-2014		04-01-2021		1,070		(3,443)
S		Santander - Chile		201,340,031		5,000,000		11-15-2016		11-15-2026		12,035		(3,165)
												47,486		(80,266)

 

Arauco needs to minimize the risk of the exchange rate, as it holds debt in pesos, adjustable to reflect inflation. The objective of this position in the swap is to eliminate the uncertainty of the exchange rate, exchanging the flows derived from obligations expressed in adjustable pesos of the bonds described above, with flows in U.S. dollars (Arauco's functional currency), at a fixed and determined exchange rate as of the agreement's execution date.

 

Through an effectiveness test, and pursuant to IAS 39, we were able to validate that the aforementioned hedging instruments are highly effective within an acceptable range for Arauco, for the purposes of eliminating the uncertainty of the exchange rate in the commitments derived from the hedged object.

 

Forward contracts that are in force and effect, executed by Arauco Colombia as of December 31, 2017 and 2016, are detailed in the following table:

Exchange rate		Institution		Amount ThU.S.$			Starting date		Ending date		December 2017 Market Value ThU.S.$
USDCOP		BBVA Colombia			6,000		10-11-2017		01-10-2018			(1)
USDCOP		Corpbanca Colombia			8,000		11-14-2017		02-13-2018			(136)
USDCOP		Corpbanca Colombia			2,100		12-21-2017		03-12-2018			7
												(130)

 

Exchange rate		Institution		Amount ThU.S.$			Starting date		Ending date		December 2016 Market Value ThU.S.$
USDCOP		BBVA Colombia			5,000		10-28-2016		01-11-2017			7
USDCOP		BBVA Colombia			4,000		11-18-2016		02-09-2017			(255)
USDCOP		BBVA Colombia			7,000		12-13-2016		03-10-2017			(12)
												(260)

 

As of December 31, 2017 and 2016, Arauco Uruguay maintains the following forward contracts in force and effect for the purposes of ensuring an exchange rate for sale of dollars:

 

Exchange rate		Institution		Notional ThU.S.$			December 2017 Market Value ThU.S.$
UYUUSD		Banco Santander Uy			24,000			1,213
UYUUSD		HSBC Uruguay			9,000			543
								1,756

 

Exchange rate		Institution		Notional ThU.S.$			December 2016 Market Value ThU.S.$
UYUUSD		Banco Santander Uy			16,600			1,633
UYUUSD		Citibank U.K.			3,200			150
UYUUSD		HSBC Uruguay			10,750			1,256
								3,039

 

Arauco Uruguay's profits and losses also face exposure to the price variation of certain fuels, as occurs with Fuel Oil N°6, which is used during the cellulose manufacturing process. In order to minimize this risk, the volatility of future flows associated to the purchase of Fuel Oil No. 6 for years 2017, 2018 and part of 2019 has been limited, through forwards of this commodity. The agreements that are in force and effect as of December 31, 2017 and 2016, are detailed below:

 

Commodity		Institution		Notional ThU.S.$			December 2017 Market Value ThU.S.$
Fuel Oil N°6		JPMorgan Chase Bank, N.A.			4,760			1,372
Fuel Oil N°6		DNB Bank ASA			4,002			732
Fuel Oil N°6		Citibank U.K.			761			112
								2,216

 

Commodity		Institution		Notional ThU.S.$			December 2016 Market Value ThU.S.$
Fuel Oil N°6		JPMorgan Chase Bank, N.A.			5,508			1,059
Fuel Oil N°6		DNB Bank ASA			2,661			156
Fuel Oil N°6		Citibank U.K.			378			83
								1,298

 

In addition, Arauco Uruguay's maintains an Interest Rate Swap in force and effect, a derivative instrument which purpose is to set the interest rate of a variable rate debt in the same currency (USD). The valuation off this instrument as of December 31, 2017, is shown below:

 

Exchange rate		Institution		Notional ThU.S.$			December 2017 Market Value ThU.S.$
USD		DNB Bank ASA			50,638			729

 

Exchange rate		Institution		Notional ThU.S.$			December 2016 Market Value ThU.S.$
USD		DNB Bank ASA			59,077			650

 

 

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. In the consolidated statements of financial position, they are included in line items “Cash and cash equivalents” (certain components of cash and cash equivalents), “Trade and Other Current/Non-Current Receivables” and “Accounts receivable due from related parties”.

 

Loans and receivables are measured at amortized cost using the effective interest method and are tested for impairment. Financial assets that are classified as loans and receivables are: cash and cash-equivalents, time deposits, repurchase agreements, trade and other current/non-current receivables, and accounts receivable due from related parties.

 

As of December 31, 2017 and 2016, there are provisions for impairment for ThU.S.$ 14,501 and ThU.S.$ 16,644, respectively.

 

		December 2017		December 2016
		ThU.S.$		ThU.S.$
Loans and Accounts Receivables		1,351,712		1,126,182
Cash and cash equivalents		516,716		396,837
Cash		209,185		149,446
Time Deposits		292,105		247,391
Agreements		15,426		-
Trade and other receivables (net)		834,996		729,345
Trade and other receivables		709,983		600,589
Lease receivable		13,106		764
Other receivables		107,363		114,530
Accounts receivable due from related parties		4,544		13,462

 

Includes cash on hand, bank checking account balances and time deposits and other short term highly liquid investments with an original maturity of three months or less. They are short-term, highly liquid investments that are readily convertible to known amounts of cash, and which are subject to an insignificant risk of changes in value.

The composition of cash and cash equivalents (including the balance of mutual funds displayed in this note as valuation, instruments at fair value with profit or loss) at December 31, 2017 and December 31, 2016, classified by origin coins is as follow:

 

		12-31-2017			12-31-2016
		ThU.S.$			ThU.S.$
Cash and Cash Equivalents			589,886			592,253
U.S. Dollars			501,352			524,426
Euro			4,306			2,357
Other currencies			61,037			55,069
Chilean pesos			23,191			10,401

 

23.5.2 Time Deposits and Repurchase Agreements: The investment objective of time deposits and repurchase agreements is to maximize in the short-term the amounts of cash surpluses. These instruments are authorized by Arauco’s Investment Policy, which allows investing in fixed income securities. These instruments have a maturity of less than three months from the date of acquisition.

 

23.5.3 Trade and Other Receivables: These represent enforceable rights for Arauco resulting from the normal course of the business.

23.5.4 Other Receivables: These correspond to receivables from sales, services or loans that are not considered within the normal course of the business.

 

The provision for doubtful accounts is presented as a deduction of trade and other receivables. The provision for doubtful accounts is established based on an analysis of the age of the portfolio and considering the insurance coverage on accounts receivable. Other conditions are assessed for example when there is objective evidence that Arauco will not receive payments under the original sale terms and when the customer is a party to a bankruptcy court agreement or cessation of payments, and is written-off when Arauco has exhausted all levels of recovery of the receivable in a reasonable time.

23.5.5 Accounts receivable due from related parties: Represent enforceable rights for Arauco resulting from the normal course of business, calling normal to the line of business, activity or purpose of exploitation and financing, and which Arauco owns a non-controlling ownership of the counterparty.

 

The following table sets forth trade and other current/non-current receivables classified by currencies as of December 31, 2017 and December 31, 2016:

 

		12-31-2017			12-31-2016
		ThU.S.$			ThU.S.$
Trades and other current receivables			814,412			701,610
U.S. Dollars			550,674			489,056
Euros			20,498			26,544
Other currencies			134,238			77,907
Chilean pesos			106,442			106,681
U.F.			2,560			1,422
Accounts receivable from related parties, current			3,488			12,505
U.S. Dollars			726			274
Other currencies			171			726
Chilean pesos			2,192			10,548
U.F.			399			957
Trade and other non-current receivables			16,040			14,273
U.S. Dollars			4,247			6,895
Other currencies			3,345			527
Chilean pesos			6,692			5,753
U.F.			1,756			1,098
Accounts receivable from related parties, non-current			1,056			957
U.F.			1,056			957

 

Arauco’s financial liabilities to the date of these consolidated financial statements are as follows:

 

Financial Liabilities		December 2017 ThU.S.$			December 2016 ThU.S.$
Total Financial Liabilities			5,007,465			5,110,088
Financial liabilities at fair value through profit or loss (held for trading)			137			336
Hedging Liabilities			5,256			87,027
Financial Liabilities Measured at Amortized Cost			5,002,072			5,022,725

 

The following table sets forth the current portion of the non-current bank borrowings and debt issued as of December 31, 2017 and 2016.

 

		December 2017 ThU.S.$			December 2016 ThU.S.$
Bank borrowings - current portion			92,693			88,028
Bonds issued - current portion			107,268			62,506
Total			199,961			150,534

 

23.7 Financial Liabilities Measured at Amortized Cost

 

Financial liabilities correspond to non-derivative financial instruments with contractual cash-flow payments that can be either fixed or variable.

 

Also, this category includes those non-derivative financial liabilities for services or goods delivered to Arauco at the end of each reporting period that have not yet been paid. These amounts are not insured and are generally paid within thirty days after being recognized.

 

At the end of each reporting period, Arauco includes in this category bank borrowings, bonds issued denominated in U.S. Dollars and in U.F., trade and other payables.

 

				12-31-2017			12-31-2016			12-31-2017			12-31-2016
				ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
		Currency		Amortized Cost						Fair Value
Total Financial Liabilities					5,002,072			5,022,725			5,198,654			5,158,789
Bonds Issued		U.S. Dollar			2,057,747			2,321,980			2,135,893			2,480,063
Bonds Issued		U.F.			1,244,938			1,130,679			1,333,087			1,078,934
Bank borrowings		U.S. Dollar			834,908			891,338			870,399			926,070
Bank borrowings		Other currencies			23,549			23,020			23,358			23,020
Financial Leasing		Other currencies			96,913			98,316			92,542			94,052
Financial Leasing		Chilean pesos			15,463			15,670			14,821			14,928
Trades and Other Payables		U.S. Dollar			194,342			150,162			194,342			150,162
Trades and Other Payables		Euro			8,848			13,034			8,848			13,034
Trades and Other Payables		Other currencies			158,567			70,736			158,567			70,736
Trades and Other Payables		Chilean pesos			333,529			285,359			333,529			285,359
Trades and Other Payables		U.F.			22,060			18,600			22,060			18,600
Related party payables		U.S. Dollar			1,354			1,969			1,354			1,968
Related party payables		Chilean pesos			9,854			1,862			9,854			1,863

The financial liabilities at amortized cost presented in the consolidated statements of financial positions as of December 31, 2017 and 2016 are as follows: 

		December 2017
		Current ThU.S.$			Non-Current ThU.S.$			Total ThU.S.$
Other financial liabilities			500,207			3,773,311			4,273,518
Trade and other payables			717,346			-			717,346
Related Party Payables			11,208			-			11,208
Total Financial Liabilities Measured at Amortized Cost			1,228,761			3,773,311			5,002,072

 

		December 2016
		Current ThU.S.$			Non-Current ThU.S.$			Total ThU.S.$
Other financial liabilities			697,000			3,784,003			4,481,003
Trade and other payables			537,891			-			537,891
Related Party Payables			3,831			-			3,831
Total Financial Liabilities Measured at Amortized Cost			1,238,722			3,784,003			5,022,725

The following table sets forth the reconciliation balances of cash flow hedges presented in Other Comprehensive Income:

 

		January-December
		2017			2016			2015
		ThU.S.$			ThU.S.$			ThU.S.$
Opening balance			1,096			(55,396)			(53,022)
Gains (losses) on cash flow hedges			22,212			84,045			11,859
Recycle of cash flow hedges to profit or loss			(16,965)			(10,198)			(16,122)
Income tax			(5,917)			(20,055)			(1,738)
Recycle of income tax			4,326			2,700			3,627
Closing balance			4,752			1,096			(55,396)

 

23.9 Capital Disclosures

 

Arauco’s policies on capital management have the objective of:

 

 

Arauco determines and manages its capital structure based on its carrying amount of equity plus its financial debt (bank borrowings and bonds issued).

The following table sets forth the financial covenants that the Company has to comply with as part of the terms of certain of its obligations:

								Interest
		December 2017			December 2016			coverage		Debt level
Instrument		ThU.S.$			ThU.S.$			>= 2,0x		(1) <= 1,2x
Domestic bonds (Chile)			1,244,939			1,130,679		N/R		v
Syndicate Loan Scotia			199,597			298,967		v		v
Syndicate Loan Banco Estado - Grayling			130,953			-		v		v

N/R: Not required for the financial obligation

(1) Debt to equity ratio (financial debt divided by equity plus non-controlling interests)

 

As of December 31, 2017 and December 31, 2016, Arauco has complied with all of its financial covenants.

 

The following table sets forth the credit ratings of our debt instruments as of December 31, 2017, are as follows:

 

Instrument		Standard &; Poor’s		Fitch Ratings		Moody’s		Feller Rate
Local bonds		-		AA-		-		AA-
Foreign bonds		BBB-		BBB		Baa3		-

 

Capitalization requirements are established based on the Company’s financial needs and on maintaining an adequate liquidity level and complying with financial covenants established in current debt arrangements. The Company manages its capital structure and makes adjustments based on the prevailing economic conditions in order to mitigate the risks associated with adverse market conditions, and based on opportunities that may arise to improve the Company’s level of liquidity.

 

The capitalization of Arauco as of December 31, 2017 and December 31, 2016 is as follows:

 

		December 2017			December 2016
		ThU.S.$			ThU.S.$
Equity			7,116,893			6,999,283
Bank borrowings			858,457			914,358
Financial leasing			112,376			113,986
Bonds issued			3,302,685			3,452,659
Capitalization			11,390,411			11,480,286

 

23.10 Risk Management

 

Arauco’s financial instruments are exposed to various financial risks: credit risk, liquidity risk and market risk (including exchange rate risks, interest rate risks and price risks).

 

Arauco’s overall risk management program focuses on uncertainty in financial markets and aims to minimize potential adverse effects on Arauco’s financial profitability.

 

Arauco’s financial risk management is overseen by the Corporate Finance Department. This department identifies, assesses and hedges financial risks in close collaboration with Arauco’s operational units.

 

Credit risk refers to financial uncertainty at different periods of time relating to the fulfillment of obligations with counterparties, at the time of exercising the contract rights to receive cash or other financial assets on behalf of Arauco.

Arauco’s exposure to credit risk is directly related to each of its customer’s individual abilities to fulfill their contractual commitments, reflected in trade receivables.

 

Accounts exposed to credit risk are: trade receivable, financial lease debtors and other debtors.

 

Arauco does not have a securitized portfolio.

 

		December 2017			December 2016
		ThU.S.$			ThU.S.$
Current Receivables
Trade receivables			706,485			598,597
Financial lease receivables			11,932			411
Other debtors			95,995			102,602
Net subtotal			814,412			701,610
Trade receivables			715,217			609,102
Financial lease receivables			12,033			512
Other debtors			101,663			108,640
Gross subtotal			828,913			718,254
Provision for doubtful trade receivables			8,732			10,505
Provision for doubtful lease receivables			101			101
Provision for doubtful other debtors			5,668			6,038
Subtotal Bad Debt			14,501			16,644
Non-Current Receivables
Trade receivables			3,498			1,992
Financial lease receivables			1,174			353
Other debtors			11,368			11,928
Net Subtotal			16,040			14,273
Trade receivables			3,498			1,992
Financial lease receivables			1,174			353
Other debtors			11,368			11,928
Gross subtotal			16,040			14,273
Provision for doubtful trade receivables			-			-
Provision for doubtful lease receivables			-			-
Provision for doubtful other debtors			-			-
Subtotal Bad Debt			-			-

 

The Credit and Collections Sub-Division, dependent from the Treasury Division, is the area entrusted with minimizing the credit risk of the accounts receivable, supervising the delinquency of the accounts. The regulations and procedures applicable for the control and administration of the Arauco Group can be found in the Corporate Credit Policy.

As of December 31, 2017, Arauco’s balance for commercial Debtors was ThU.S.$ 718,714 of which, according to the agreed sales conditions, 59.18% corresponded to sales on credit (open account), 37.83% to sales with letters of credit and 2.99% to other types of sales, distributed in 2,245 debtors. The client with the largest Open Account debt represented 3.49% of the total accounts receivable as of that date.

 

Below we provide detail regarding accounts receivable, classified in tranches.

 

December 31, 2017
Age of trade receivables
Days		Non- past due		1 to 30		31 to 60		61 to 90		91 to 120		121 to 150		151 to 180		181 to 210		211 to 250		More than 250		Total
ThU.S.$		662,963		39,459		551		955		50		34		2,238		56		97		12,312		718,715
%		92.20%		5.50%		0.10%		0.10%		0.00%		0.00%		0.30%		0.00%		0.00%		1.70%		100%

 

December 31, 2016
Age of trade receivables
Days		Non- past due		1 to 30		31 to 60		61 to 90		91 to 120		121 to 150		151 to 180		181 to 210		211 to 250		More than 250		Total
ThU.S.$		564,378		31,106		257		881		39		18		21		11		64		14,319		611,094
%		92.40%		5.10%		0.00%		0.10%		0.00%		0.00%		0.00%		0.00%		0.00%		2.30%		100%

 

Arauco does not conduct rescheduling or renegotiations with its clients that imply an amendment to the maturity of the invoices and, should it be necessary, any debt renegotiation with a client shall be analyzed on a case-by-case basis and subjected to the approval of the Corporate Finance Division. 

 

Regarding the provisions from non-enforceable accounts, below we provide detail for the movements as of December 31, 2017, 2016 and 2015:

 

		12-31-2017			12-31-2016			12-31-2015
		ThU.S.$			ThU.S.$			ThU.S.$
Opening balance			(16,644)			(19,860)			(18,520)
Impairment losses recognized on receivables			(139)			(3,950)			(3,072)
Reversal of impairment losses			2,282			7,166			1,732
Closing balance			(14,501)			(16,644)			(19,860)