Fitch Ratings affirms Klabin's 'BBB-' foreign and local currency issuer default ratings, negative rating outlook for international IDRs, 'AA(bra)' national scale rating, stable rating outlook for national scale rating
RIO DE JANEIRO
June 16, 2014
– Fitch Ratings has affirmed Klabin S.A.'s foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-'. The Rating Outlook for Klabin's international IDRs remains Negative. Concurrent with these rating actions, Fitch has affirmed the company's 'AA(bra)' national scale rating. The Rating Outlook for Klabin's national scale rating is Stable.
Klabin's ratings reflect the company's leading position in the Brazilian packaging sector, its large forestry base that provides it with a low production cost structure, as well as its high degree of vertical integration, which enhances its product flexibility in the competitive but fragmented packaging industry. Klabin's consistently strong liquidity position is also a positive factor in the company's ratings.
The Negative Outlook for Klabin's international IDRs reflects the expectation that leverage will increase as a result of the company's high investments over the next three years, highlighted by the construction of a BRL7.2 billion pulp mill. Although funding of the mill will be with a mix of debt and equity, during the construction phase Fitch projects that the company's net leverage will exceed 4.0x, which is weak for the rating category. If the Brazilian real would strengthen considerably versus the U.S. dollar strongly during this time period, the company's cash flow could weaken relative to Fitch's current expectations and net leverage could approach 5.0x, which may result in a ratings downgrade.
KEY RATING DRIVERS
Leading Position in the Brazilian Packaging Segment
Klabin is the leader in the Brazilian corrugated boxes and coated board sectors with market shares of 15% and 50%, respectively. In the Brazilian market, the company is the sole producer of liquid packaging board and is the largest producer of kraftliner and multiwall and industrial bags. Tetra Pak is the sole consumer of the company's liquid packaging board, accounting for 22% of sales. Klabin sources much of its fiber requirements from hardwood and softwood trees grown on 243,000 hectares of plantations it has developed on 494,000 hectares of land it owns. The company's size, access to inexpensive fiber and high level of integration relative to many of its competitors give it competitive advantages that are viewed to be sustainable.
Leverage to Increase Due to Heavy Investment Cycle
Klabin plans to invest about BRL10 billion between 2014 and 2016. Fitch projects that these investments will lead to an increase in Klabin's net debt-to-EBTIDA ratio to approximately 4.0x during 2014 and closer to 4.5x during 2015. This level of leverage is high for the rating category and is substantially higher than the 2.7x net leverage averaged by the company between 2010 and 2013. The main expenses are related to the construction of a new pulp mill that will have an annual production capacity of 1.5 million tons of pulp and should become operational in March 2016. Klabin intends to finance the BRL7.2 billion mill with BRL1.7 billion of equity and BRL5.5 billion of debt, including BRL4 billion of loans from BNDES already approved. As of March 31, 2014, Klabin's total debt/LTM EBITDA and net debt/LTM EBITDA ratios were 5.1x and 2.0x, respectively, and its FFO net leverage ratio was 1.8x.
The new pulp mill should generate about BRL1 billion of EBITDA in 2017, in addition to the BRL100 million EBITDA generated from energy sale, and considers a conservative level of USD260 EBITDA per ton of pulp. Consequently, Fitch projects net leverage to fall to below 3.0x by 2017 and expects Klabin to conservatively manage its leverage ratios before entering in a new investment phase.
Free Cash Flow to Remain Negative up to 2016
Klabin has been able to generate strong operational cash flow with funds from operations (FFO) above BRL1 billion since 2012. During the LTM ended March 31, 2014, cash flow from operations (CFFO) was BRL1.2 billion. This compares with an average of BRL997 million in 2012 and 2013. With investments of BRL1.2 billion and dividends of BRL301 million, free cash flow (FCF) was negative BRL364 million in during the LTM. During the LTM Klabin's EBITDA was BRL1.6 billion. Negative free cash flow will accelerate as the company's expenses for the mill increase. Klabin invested only BRL446 million in the new pulp mill during 2013 and in the first quarter of 2014. The new mill should improve operating cash flow significantly. Fitch projects that the new mill should generate more than USD250 per ton of EBITDA at hardwood (BEKP) and softwood prices (BSKP) in Asia of USD640 per ton and USD700 per ton, respectively. These prices, which reflect oversupply of pulp, would add about BRL825 million to the company's annual EBITDA. At more elevate BEKP and BSKP prices of USD840 per ton and USD900 per ton, respectively, the company's EBITDA would be BRL1.5 billion higher.
Solid Liquidity Position & Manageable Debt Amortization
Klabin's solid liquidity position remains a key credit consideration. As of March 31, 2014, Klabin's had BRL4.9 billion of cash and marketable securities and BRL8 billion of total debt, of which BRL1.2 billion is short term debt. The company's cash position increased from BRL3 billion at the end of 2013 due to its issuance of a BRL1.7 billion mandatory convertible debenture in January. Klabin's liquidity is enhanced with BRL600 million of unused standby credit facilities. The company's debt maturity schedule is manageable and evenly distributed. Klabin faces debt amortizations of BRL1.2 billion in 2015 and BRL909 million in 2016. Fitch expects Klabin to continue preserving an adequate liquidity position during its expansion projects, conservatively positioning it for price and demand volatility, which is inherent in Brazil, as well as the packaging industry.
Operational Performance to Remain Strong
Fitch projects that Klabin will generate about BRL1.7 billion of EBITDA and BRL1.4 billion of FFO in 2014. The company's LTM EBITDA generation of BRL1.6 billion was an improvement from BRL1.5 billion in 2013 and BRL1.3 billion in 2012. Klabin's EBITDA margin of 33% is high for the industry and reflects its strong market position and integrated cost structure. During 2013, Klabin sold 1.8 million tons of paper (up 3.6% compared to 2012) and 2.9 million tons of wood. Coated boards remained as the company's main source of revenues, representing 35% of the total in 2013. Following completion of the pulp mill Fitch projects Klabin's EBITDA will increase to around BRL3.1 billion and that net leverage will decline to around 2.9x using the conservative prices for BEKP of USD640 per ton. At prices more reflective of a stronger moment in the pulp cycle with BEKP prices to China at USD840 per ton, the company's EBITDA should be around BRL3.8 billion and its net leverage should be closer to 2.4x.
Forestry Assets Are Key Credit Consideration
Further factored into Klabin's credit ratings is its large forestry base, which assures it of a competitive production cost structure in the future. As of March 31, 2014, the accounting value of the land owned by Klabin was about BRL2 billion and the value of the biological assets on its forest plantations was BRL3.8 billion. The ratio of Klabin's net debt to the value of its biological assets at the end of March 2014 was approximately 0.8x. Considering forest plantations, its peak adjusted leverage ratios (net debt minus value of biological assets/EBITDA) would be 2.5x during the years 2014 through 2016.
Klabin's ratings could be downgraded during 2015 if it does not appear that the company's net leverage will be below 3.0x following the completion of its new mill at current prices. In a stronger price environment, Fitch would expect Klabin's net leverage to be closer to 2.5. A factor that could lead to downgrade would be a strengthening of the currency versus the U.S. dollar, which would likely weaken Klabin's operating cash flow and make the company more reliant upon debt. Additional factors that could make it harder to achieve the aforementioned leverage metrics would include a more unstable macroeconomic environment that would weaken demand for the company's products as well as prices, as well as any debt financed acquisitions.
Klabin's ratings are not likely to be upgraded until the company completes its aggressive capital expenditure program. An upgrade would be considered if the new mill results in consistently higher free cash flow generation capacity. Another substantial equity increase would also be viewed favorably and could result in a return of the Rating Outlook to Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
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