Fitch Ratings assigns BBB- rating to 2024 unsecured guaranteed notes Fibria Celulose subsidiary proposes issuing, with proceeds expected to total US$500M and be used to extend debt maturity profile
RIO DE JANEIRO
May 1, 2014
– Fitch Ratings has assigned a 'BBB-' rating to the proposed 2024 notes to be issued by Fibria Overseas Finance Ltd. (Fibria Overseas), a wholly owned subsidiary of Fibria Celulose S.A. (Fibria). Proceeds from these unsecured guaranteed notes, which are expected to total USD500 million, will be used to extend debt maturity profile.
Fitch currently rates Fibria and Fibria Overseas as follows:
--Long-term foreign currency Issuer Default Rating (IDR) 'BBB-';
--Long-term local currency IDR 'BBB-';
--Long-term national scale rating 'AA+(bra)'.
--Long-term foreign currency IDR 'BBB-';
--USD63 million senior notes due 2019 'BBB-';
--USD561 million senior notes due 2021 'BBB-'.
The Rating Outlooks for Fibria and Fibria Overseas is Stable.
Fibria's ratings reflect the company's excellent business position as the world's leading producer of market pulp, with 5.3 million tons of bleached eucalyptus kraft market pulp capacity. The company's sales volumes are more stable than most companies within the industry, as more than 50% are directed toward the tissue paper market.
The ratings also incorporate Fibria's disciplined approach to reducing debt during the past two years despite relatively weak market conditions. During this time period, the company generated more than USD800 million of free cash flow (FCF) and raised about USD725 million of equity. Fibria had USD3.7 billion of total debt as of March 31, 2014 and USD2.9 billion of net debt. These figures compare favorably with USD6.1 billion of total debt and USD5 billion of net debt at the end of 2011.
Fibria's ratings also build in an expectation that the company will likely go ahead with the expansion of its Tres Lagoas mill. Capex for this mill should be around USD2.5 billion and will be heavily concentrated in 2015 and 2016. Market conditions should continue to be challenging during 2014 and 2015 due to the startup of pulp mills in Brazil and Uruguay. Fibria's net leverage is projected by Fitch to reach 3.0x before construction of the mill would be completed, which is most likely in the first half of 2017.
KEY RATING DRIVERS
Excellent Business Position
Fibria's ratings continue to reflect the company's excellent business position. Fibria is the world's leading producer of market pulp with 5.3 million tons of bleached eucalyptus kraft (BEKP) market pulp capacity. The company's leading position is viewed to be sustainable due to its ownership of 962 thousand hectares of forest assets in Brazil upon which it has developed 558 thousand hectares of eucalyptus plantations. 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 cost of fiber and transportation costs between forest and mills.
Declining Leverage and Absolute Debt Levels
Fibria's 2013 EBITDA generation benefited from higher pulp prices and depreciation of the Brazilian real against the U.S. dollar. The company generated USD1.3 billion of EBITDA and USD804 million of funds from operations (FFO) in the latest 12 months (LTM) ended March 2014. Management initiatives have led to USD2.1 billion of net debt reduction since the end of 2011 despite difficult market conditions. The company's proactive steps to reduce leverage included the issuance of USD658 million of equity. About USD200 million of the debt reduction was due to Fibria's decision to sell approximately 210,000 hectares of land to Parkia Participacoes for up to BRL1.650 billion. As of March 31, 2014, Fibria had a net debt/EBITDA ratio of 2.3x and an FFO net leverage ratio of 3.6x. These ratios compare favorably versus 3.4x and 4.7x, respectively, in 2012.
Challenging Market Conditions
2014 and 2015 are projected to be difficult for the pulp market and pricing pressure could intensify following the pipeline of new projects. Combined, these mills will expand supply by about 9% in a market where demand is struggling to grow by more than 2%. In 2013, pulp prices were better than forecasted due to some delays in the scheduled startups of new mills and closure of about 1 million tons of market capacity, along with increased demand for pulp from China and North America and a slow recovery in other parts of the world.
Credit Metrics to Remain Strong in 2014
Fitch projects that Fibria will generate about USD1.3 billion of EBITDA and USD1.1 billion of FFO in 2014 and that net leverage will decline to around 2.0x. This level of EBITDA is similar to 2013 despite Fitch's projection that the company' net pulp price received should decline to USD600 per ton in 2014 from USD618 in 2013. The weakness of the Brazilian real versus the U.S. dollar is a key variable in Fitch's projection that EBITDA will remains steady despite declining pulp prices as nearly 85% of the company's costs are denominated in reais. During 2013, the company's cash cost of production declined to USD200 per ton from USD220 per ton as the Brazilian real devalued versus the U.S. dollar by 17%. With capital expenditures projected to be USD600 million and no dividend distributions, Fibria should generate about USD450 million of FCF.
Pulp Project to Temporarily Elevate Leverage
Fibria will decide during 2014 if it will build a new pulp mill, Tres Lagoas II. Fitch's base case projection is that the company will proceed with the project given its cost structure, which should be among the lowest cost in the world due to the high quality forestry assets around the potential mill and the favorable logistics system. Fibria had previously postponed this project, as well as an expansion of Veracel, as it sought to be a leader in the consolidation of the industry. Investments of about USD2.5 billion for the expansion project would pressure the company's FCF and temporarily increase leverage. Fitch base case, which uses net pulp prices of between USD600 and USD680 per ton during the construction period, results in net leverage reaching 3.0x. Net leverage would quickly decline to around 2.0x once the mill became operational. A key variable in Fitch's projections is that the Brazilian real remains weaker than 2.5 BRL/USD.
Fibria had USD801 million of cash and marketable securities and USD644 million of short-term debt as of March 31, 2014. In March 2014, Fibria repurchased its 2020 notes and the company's strategy is to further extend debt maturity profile with the proposed notes. The company enjoys strong access to both the debt and equities market. Fibria's liquidity is enhanced with about USD656 million (USD280 million and BRL850 million lines) unused revolving credit facility. The company also has land with an accounting value of USD553 million and forestry plantations on this land that an accounting value of USD1.5 billion. Fibria has monetized portions of these holdings in the past to lower leverage and enhance liquidity. The company received BRL500 million in December 2013 and BRL883 million in the first quarter of 2014 from the sale of land and should receive an additional BRL20 million up to June 2014.
The 'BBB-' 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, 2021, and the proposed 2024 senior notes.
Any change in management's philosophy toward maintaining a stronger capital structure would be viewed negatively and could lead to a negative rating action. A significant increase in leverage ratios, above the levels projected by Fitch, and/or a sharp deterioration of market conditions could also pressure the classification. A debt financed acquisition could also lead to a downgrade. A positive rating action is not expected in the medium term.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
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