Moody's revises rating outlook for Fibria Celulose to stable from positive, affirms long-term ratings
December 21, 2011
– Moody's Investors Service has revised the rating outlook of Fibria Celulose S.A.to stable from positive and affirmed the long-term ratings, including its Ba1 Corporate Family Rating.
Issuer: Fibria Celulose S.A.
- Corporate Family Rating: Ba1 (global scale); Aa2.br (Brazilian national scale)
Issuer: Fibria Overseas Finance Ltd (Cayman Islands)
- USD 750 million senior unsecured guaranteed global bonds due 2021: Ba1 (foreign currency)
- USD 1.87 billion senior unsecured guaranteed notes due 2020: Ba1 (foreign currency)
- USD 63 million senior unsecured guaranteed notes due 2019: Ba1 (foreign currency)
The outlook for all ratings is stable.
The change in outlook to stable reflects weakening operational performance due to the deterioration in the industry's fundamentals globally as well as the impact of the recent domestic currency (Real) depreciation on leverage metrics, which led to a net loss in 3Q11. The outlook has diminished due to the further weakening in pulp prices amid significant expansion plans for pulp in South America over the next few years (+8 million tons of new capacity expected between 2013-2016 although some of this new capacity may ultimately be delayed). Higher leverage and weaker operating results led Fibria to postpone the decision on capacity expansion at the Três Lagoas mill until the end of 2012, which is expected to gradually bring leverage to levels more commensurate with the Ba1 rating while maintaining healthy liquidity.
Fibria's Ba1 rating reflects the company's leading position as the world's largest producer of market pulp, its extremely competitive production costs which are among the lowest worldwide based on its structural cost advantages when compared with international peers, including self-sufficiency in wood fiber and electricity and efficient logistics. Revenues are largely generated under long-term supply contracts that support stable sales volume with good geographic diversification. Fibria's low product diversity and its relative small size when compared with global peers as measured by net revenues are constraining factors for its rating. Operational diversity is good with pulp production spread over four plants, although 69% of capacity is concentrated in two site locations. Additionally, the Ba1 rating incorporates the benefit from the ownership by and expected support from Votorantim Participações S.A. (Baa3, outlook stable) due to existing cross default provisions in part of Votorantim's outstanding debt. Also, our view of Fibria's strong ownership considers the fact that the Brazilian Development Bank BNDES (A3, outlook stable) is currently its largest individual shareholder through its subsidiary BNDES Participações S.A. (A3, outlook stable) with 30.4% of Fibria's voting and total capital, and a major lender to the company.
The company´s liquidity profile is adequate, supported by its BRL 2 billion in cash as of September 2011. We expect Fibria will continue to be free cash flow positive in 2012 and will continue to have ample access to pre-export financing in support of the maintenance of adequate liquidity. We also expect Fibria will proactively manage its compliance levels as leverage covenants will tighten. Current covenants under existing debts totaling some BRL 2.5 billion set maximum leverage expressed by Net Debt to EBITDA at 4.25 x as of September 2011, going down to 4.0x as of December 2011 (4.2x reported as of LTM ended September 30, 2011). Also, we believe that the Brazilian Development Bank - BNDES will continue to finance a substantial portion of Fibria's capital spending.
The ratings could be upgraded if Fibria manages to reduce leverage as measured by Total Adjusted Debt to Adjusted EBITDA approaching 3x (4.6x as of LTM ended September 30, 2011) together with Retained Cash Flow (defined as Funds From Operations less Dividends) less Capex to Total Adjusted Debt above 12% on a consistent basis (5.4% as of LTM ended September 30, 2011).
Downgrade pressure on the ratings would result if Fibria is unable to continue to delever, or experiences a deterioration in liquidity. Also, a deterioration of VPAR's credit quality could negatively impact Fibria's ratings. A substantial increase in secured debt could negatively affect the senior unsecured notes rating. Negative rating pressure would arise should Total Adjusted Debt to Adjusted EBITDA stay above 4.5x consistently in the upcoming quarters together with Retained Cash Flow (defined as Funds From Operations less Dividends) less Capex to Total Adjusted Debt below 5% on a consistent basis (5.4% as of LTM ended September 30, 2011), and Adjusted EBITDA to Interest expenses below 2.5x (2.9x as of LTM ended September 2011) on a consistent basis. All credit metrics are adjusted according to Moody's standard adjustments and definitions.
The principal methodology used in rating Fibria was Moody's Global Paper and Forest Products Industry rating methodology published in September 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.
Fibria Celulose S.A. is the largest producer of market pulp in the world, with pulp capacity of 5.25 million tons/year. In the LTM ended September 30, 2011, Fibria reported consolidated net revenues of BRL 6.0 billion (approximately USD 3.7 billion converted by the average foreign exchange rate).
Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".br" for Brazil. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".
The Local Market analyst for this rating is Barbara Mattos 5511-3043-7357
Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 31 January 2012. ESMA may extend the use of credit ratings for regulatory purposes in the European Community for three additional months, until 30 April 2012, if ESMA decides that exceptional circumstances arise that may imply potential market disruption or financial instability. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.
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