Fitch Affirms Fibria's IDRs at 'BB+'; Revises Outlook to Positive
CHICAGO -- February 22, 2013
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 also 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 Outlooks for Fibria and Fibria Overseas have been revised to
Positive from Stable.
The revision of the Outlooks to Positive is a result of aggressive actions by
Fibria's management that led to a reduction in the company's net debt to
USD3.7 billion as of Dec. 31, 2012 from USD5.9 billion as of Dec. 31, 2010.
This level of debt reduction occurred despite difficult market conditions that
resulted in a decline in the company's EBITDA to USD1.1 billion in 2012, from
USD1.2 billion in 2011 and USD1.6 billion in 2010. Key initiatives executed by
Fibria included the issuance of equity and the sale of paper assets and land.
Fibria's approach to lowering debt during a period of negative market
conditions is in contrast to many other industry participants, which have
allowed their leverage to increase sharply. Fitch's Positive Outlook for
Fibria builds in the expectation that the company will lower its net debt by
approximately USD300 million during 2013.
KEY RATING DRIVERS
Excellent Business Position
Fibria's 'BB+' and 'AA-(bra)' ratings continue to reflect the company's
excellent business position. It is the world's leading producer of market pulp
with 5.250 million tons of bleached eucalyptus kraft (BEKP) market pulp
capacity. 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. The company's leading position is viewed to be sustainable due
to its ownership of 970,016 hectares of land in Brazil upon which it has
developed 562,995 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
Pulp conditions have been difficult in 2012 and 2011 due to excess capacity
and weak demand for pulp in the U.S. and Europe. Fibria generated USD781
million of funds from operations (FFO) during 2012. This compares with USD794
million in 2011 and is sharply below USD1.3 billion of FFO in 2010. Management
initiatives have led to USD2.2 billion of net debt reduction since the end of
2010 despite difficult market conditions. The most important was a USD658
million equity issuance and the sale of the Losango forestry assets for USD308
million. As a result of the aforementioned, Fibria ended 2012 with a net
debt/EBITDA ratio of 3.4x and an FFO net leverage ratio of 3.3x. These ratios
compare favorably versus 4.2x and 4.1x, respectively, in 2011.
Challenging Market Conditions
Market conditions should continue to be challenging during 2013 and 2014 due
to the startup of three new pulp mills in Brazil and Uruguay that will have an
annual production capacity of 4.3 million tons of BEKP. These mills will
increase the supply by about 8% in a market where demand is struggling to grow
by more than 2%. Positively, there have been some delays in the scheduled
startups of these mills. There has also been closure of about 700,000 tons of
market capacity. The combination of these factors, along with increased demand
for pulp from China and a slow recovery in other parts of the world should
lift price slightly above the depressed levels of 2012.
Debt Reduction to Continue in 2013
Fitch projects that Fibria will generate about USD1.2 billion of EBITDA and
USD950 million of FFO in 2013. With working capital needs expected to decline
by USD25 million, capital expenditures projected to be USD600 million and no
dividend distributions, Fibria should generate about USD350 million of free
cash flow and that can be used to reduce the company's net debt to about
USD3.3 billion. This would result in a net debt/EBITDA ratio of 2.8x and an
FFO net leverage ratio of 3.1x. Fitch used a BEKP delivered price to Europe of
USD800 per ton in its 2013 projections, which is an increase of USD50 per ton
versus the actual average for 2012. Pulp prices should weaken in 2014 as all
of the new mills should be online and running at increasingly higher capacity
utilization levels. Fitch projects Fibria's EBITDA to decline to about USD1
billion and its FFO to be approximately USD700 million during 2014, using a
projected price of for BEKP of USD775 per ton. While leverage metrics may
slightly deteriorate from projected 2013 levels, free cash flow should be
between USD100 million and USD200 million during 2014, which would allow for
additional for debt reduction.
Liquidity Remains Strong
Fibria had USD1.6 billion of cash and marketable securities and USD562 million
of short term debt. The company enjoys strong access to both the debt and
equities market. Fibria's liquidity is enhanced with USD500 million unused
revolving credit facility. The company also has land with an accounting value
of USD900 million and forestry plantations on this land that an accounting
value of USD1.650 billion. Fibria has monetized portions of these holdings in
the past to lower leverage and enhance liquidity.
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.
Fibria's credit ratios can be higher than median ratios for a given rating
category due to its large land holdings, a production cost structure that is
in lowest quartile for the industry, and its position as the largest producer
in industry with stable client base. Currently, the company's credit profile
is considered strong for the 'BB+' and 'AA-(bra)' rating categories. Net debt
reduction by about USD300 million would be viewed positively and could lead to
Any change in management's philosophy toward maintaining a stronger capital
structure would be viewed negatively and could lead to the removal of the
Positive Outlook. A debt financed acquisition could also lead to a negative
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.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 10, 2012);
--'National Ratings - Methodology Update' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
National Ratings Criteria
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Elizabeth Fogerty, New York
+1 (212) 908 0526
Joe Bormann, CFA
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Daniel Kastholm, CFA
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