Fitch affirms Fibria's IDRs at BB+, national scale rating at AA-; outlook remains stable
February 23, 2012
– Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) of Fibria Celulose S.A. (Fibria) at 'BB+'. Fitch has also affirmed Fibria's national scale rating at 'AA- (bra).' In conjunction with these affirmations, Fitch has affirmed the foreign currency IDR of Fibria Overseas Finance Ltd. (Fibria Overseas) at 'BB+,' as well its 2019, 2020 and 2021 guaranteed notes.
The Rating Outlook remains Stable.
The affirmations of Fibria's ratings come despite high levels of leverage for the rating category. They build in an expectation that the company will lower debt and leverage during 2012 through some combination of asset sales, new equity and free cash flow from operations so that net leverage will be at or below 3.0 times (x). The Stable Rating Outlook reflects Fitch's belief that the company will execute these steps to the degree necessary to maintain the credit at the 'BB+' level. Absent these actions by the company and its controlling shareholders, a ratings downgrade is likely.
Similar to other market pulp producers, Fibria's results were weak during 2011. Prices fell sharply during the second half of the year due to falling demand for paper in Europe, a result of the European debt crisis, and excess paper capacity in China. Fibria generated only BRL1.3 billion of funds from operations (FFO) during 2011. This represents a 40% decline from its FFO of BRL2.2 billion in 2010. With working capital relatively unchanged, cash from operations dropped 23% to BRL1.3 billion from BRL1.7 billion.
Fibria's EBITDA deteriorated at similar pace, falling to BRL2 billion during 2011 from BRL2.8 billion during 2010. The company spent BRL1.2 billion on capital expenses during 2011 and BRL264 million on dividends, resulting in a negative free cash flow of BRL156 million. This compares with a positive free cash flow of BRL630 million in 2010.
The sharp devaluation of the Brazilian real versus the U.S. dollar during the second half of the year caused reported debt to increase by about BRL1 billion, as approximately 90% of the company's debt is denominated in foreign currencies, namely the U.S. dollar. During the year, Fibria sold BRL2.1 billion of assets. The impact of the devaluation offset much of the debt repayment from proceeds of these sales. As a result, net debt declined by only BRL521 million during 2011 to BRL9.350 billion.
Fibria's net debt/EBITDA ratio was 4.7x and its FFO adjusted leverage ratio was 5.6x during 2011. These ratios compare with ratios of 3.6x and 3.7x during 2010. If the relationship between the U.S. dollar and Brazilian real had remained unchanged during 2011, leverage still would have risen to an estimated 4.3x. This level of debt is above the company's policy, which calls for debt to be around 2.5x and no higher than 3.5x during an expansion period.
Market conditions look to be very difficult during 2012 and 2013 due to about four million tons of new pulp capacity in Latin America and weak demand for paper in Europe, which has resulted in some integrated producers closing their paper mills and selling pulp to Asia. To adjust to this adverse operating environment and its leveraged capital structure, Fibria is decreasing its capex to less than BRL1 billion during 2012. The company has also announced its intentions to sell about BRL1 billion of non-cash-generating assets. The largest of the targeted asset sales is called Losango. The land and forests of Losango have an accounting value of approximately BRL600 million.
Continued credit strengths of Fibria include its strong business position and large forestry base. The favorable business position is a result of Fibria's leading position in the market pulp industry with 5.3 million tons of production capacity and a production cost structure that is amongst the lowest in the world. Fibria's sales volumes are more stable than most companies within the industry, as more than 50% of its sales are directed toward the tissue paper market.
Fibria owns 972,415 hectares of land in Brazil, upon which it developed nearly 569,000 hectares of eucalyptus plantations. These assets had an accounting value of approximately BRL5.1 billion as of Dec. 31, 2011. The nearly ideal conditions for growing trees in Brazil make these plantations extremely efficient by global standards and give the company a sustainable advantage in terms of fiber cost.
The 'BB+' IDR of Fibria Overseas Finance Ltd. (Fibria Overseas) has been directly linked to that of its parent company Fibria through Fitch's parent and subsidiary methodology. Fibria Overseas is the Cayman Island domiciled issuer of the guaranteed 2019, 2020 and 2021 senior notes.
Additional information is available at 'www.fitchratings.com' . The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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