Fitch Affirms Klabin S.A.'s Ratings at 'BBB-'; Outlook Revised to Negative
CHICAGO -- June 17, 2013
Fitch Ratings has affirmed the 'BBB-' foreign and local currency Issuer
Default Ratings (IDR) of Klabin S.A. The Rating Outlook for Klabin's
international IDRs has been revised to Negative from Stable.
Concurrent with these rating actions, Fitch has affirmed the 'AA (bra)'
national scale rating of Klabin S.A. The Rating Outlook for the company's
national scale rating remains Stable.
The revision of the Ratings Outlook for Klabin's international IDRs to
Negative is a result of the company's decision to proceed with the
construction of a new pulp mill. The funding of this mill will be with a mix
of debt and equity. The timing, however, comes in the middle of several other
growth projects that could result in an increase in the company's net leverage
to more than 4.0x. Market conditions during the next one to two years, as well
as actions taken by Klabin's management to bolster the company's capital
structure if needed, could have a negative effect on the company's ratings.
KEY RATING DRIVERS
Leading Position in the Brazilian Packaging Segment Viewed to be Sustainable
Klabin is the leader in the Brazilian corrugated boxes and coated board
sectors with market shares of 15% and 30%, respectively. In Brazil's market,
the company is the sole producer of liquid packaging board, and is the largest
producer of kraftliner, and multi-wall and industrial bags. Tetra Pak is the
sole consumer of the company's liquid packaging board, accounting for 21% 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
506,000 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's total debt/LTM EBITDA ratio was 4.5x and its net debt/LTM EBITDA
ratio was 2.5x as of March 31, 2013. The company announced on June 11, 2013
that it will construct a pulp mill that will have an annual production
capacity of 1.5 million tons of pulp that should become operational in 2016.
Klabin intends to finance the BRL5.3 billion mill with BRL1.7 billion of
equity and BRL3.6 billion of debt. Fitch projects construction of this mill
should increase Klabin's net leverage to approximately 4.0x during 2014 and
closer to 4.5x during 2015. These projected leverage levels are high for the
'BBB-' rating category. They incorporate the expectation that the company will
proceed forward with several other key paper and packaging investment during
this time period. Consequently, Fitch does not project that net leverage will
fall to below 3.0x until 2017.
Solid Liquidity Position and Manageable Debt Amortization Schedule
Klabin's solid liquidity position is a key credit consideration. As of March
31, 2013, Klabin's had BRL2.8 billion of cash and marketable securities and
BRL1.1 billion of short term debt. The company's debt maturity schedule is
manageable and evenly distributed. Klabin faces debt amortizations of BRL914
million in 2014 and BRL954 million in 2015. 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.
Strong Operational Performance
Klabin's EBITDA was BRL1.3 billion in 2012. This compares with BRL1.1 billion
in 2011, BRL934 million in 2010 and BRL745 million in 2009. EBITDA margins
have grown to 31.8% from 25.2% during this time period. The company has
improved its cash flow through cost reductions and operational improvements.
The devaluation of the Brazilian real since the end of 2010 has also been a
contributing factor. The continued weakness of the real during 2013 has
lowered imports of packaged goods into Brazil and should positively impact the
company's 2013 cash flow from operations.
Free Cash Flow Declined During 2012 due to Growth Related Projects
Klabin has been able to generate strong cash flow from operations. Cash flow
from operations (CFFO) averaged BRL852 million between 2009 and 2012. Free
cash flow after dividends and capex was also strong during this time period,
averaging BRL225 million per year. For the LTM ended March 31, 2013, Klabin's
CFFO was BRL1.1 billion, while its free cash flow was BRL72 million.
Investments during this time period were BRL733 million, which compares with
an average of BRL430 million during the prior four years. Key investments
include a new sack kraft machine that will start operations in the fourth
quarter of 2013 and a new recycled paper machine that should become
operational in the second half of 2014.
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 Dec. 31, 2012, the company had 243,000 hectares of planted eucalyptus and
pine forests on 506,000 hectares of land it owns. The accounting value of the
land owned by the company is about BRL2.0 billion and the value of the
biological assets on its forest plantations is BRL3.4 billion. The ratio of
Klabin's net debt to the value of its biological assets at the end of 2012 was
approximately 1.0x. Considering these assets, its peak adjusted leverage
ratios (net debt minus value of biological assets/EBITDA) would be 2.9x during
the years 2013 through 2016, a period in which the company's capital
expenditures could exceed BRL9.0 billion.
Klabin's ratings could be negatively affected by a significant reduction in
the company's robust liquidity position or net leverage in excess of 4.0x at
mid-level pulp prices. Factors that could also lead to consideration of
ratings downgrades include a more unstable macroeconomic environment, which
could weaken demand for the company's products as well as prices. Debt
financed acquisitions would also likely lead to a negative rating action.
Klabin's ratings are not likely to be upgraded until the company completes its
aggressive capital expenditure program which will run from 2013 through 2016.
Upgrade considerations would include a consistent improvement in free cash
flow generation capacity from the new projects, coupled with the maintenance
of strong liquidity position and lower leverage through the cycle. A
substantial equity increase - beyond that announced for the new pulp project -
would also be viewed favorably.
Additional information is available at 'www.fitchratings.com'.
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:
National Ratings Criteria
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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Joe Bormann, CFA
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Daniel Kastholm, CFA
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