Fibria Celulose SA (FIBR3), the world’s largest pulp maker, plans to raise about 1 billion reais ($500 million) through land sales to pay debt, a step toward restoring an investment-grade credit rating, according to a person with knowledge of the proposal.
Fibria is in talks with local and U.S. pension funds to sell as much as 250,000 hectares (618,000 acres) of land, an area twice the size of New York city, said the person, who asked not to be named because the talks are private. A deal where investors would partner to buy the land and lease it back to Fibria for eucalyptus farming could be announced this year, the person said.
The land sale would help Fibria, a supplier of raw material for tissue paper to Procter & Gamble Co. and Kimberly-Clark Corp. (KMB), speed up the reduction of its net debt to 2.5 times earnings before items, a level Standard & Poor’s requires to give it an investment grade, Chief Financial Officer Guilherme Cavalcanti said.
“The land sale would accelerate our plans to regain the investment grade,” Cavalcanti, 44, said in an interview in Sao Paulo. He declined to disclose how much the company may raise or who it’s in talks with. “Our focus is to cut debt, regain the investment grade and prepare ourselves for a future consolidation, either through an expansion or through acquisitions.”
The company, formed by Votorantim Celulose & Papel SA’s bailout of Aracruz Celulose SA in 2009, is looking to cut net debt from about three times earnings before interest, taxes, depreciation, and amortization at the end of March. Standard & Poor’s said on March 15 it may raise the company’s BB+ rating, one level below investment grade, if the company cuts debt to levels closer to 2.5 times Ebitda.
Fibria has already raised $3.6 billion through the sale of assets and shares in the past four years and brought net debt down to a three-year low of 7.3 billion reais in the first quarter, according to data compiled by Bloomberg. That included the sale of Fibria’s Piracicaba paper plant to Japan’s OJI Paper Co. and its Guaiba pulp unit to Chile’s Empresas CMPC SA.
“I like the Fibria story,” Victor Penna, a Sao Paulo-based equity analyst at Banco do Brasil SA who rates the stock the equivalent of hold, said by telephone yesterday. “They’ve delivered on their promises and as soon as they regain the investment grade it’s a no-brainer that they will resume growth.”
Fibria is trading at about 29 times estimated 2013 earnings, compared with a ratio of 42 for Suzano Papel & Celulose SA, the country’s second-largest producer, and 20 for paper maker Klabin SA. Eleven analysts rate Fibria a hold, while three say sell and two recommend buying the stock.
The shares have declined 2.2 percent in Sao Paulo this year, compared with a 9.1 percent increase for Suzano and 5.6 percent for Klabin.
The pulpmaker is seeking investors who will agree to lease the land back in long-term accords to ensure supplies of eucalyptus trees for its four mills in Brazil, including its Aracruz unit, the world’s largest pulp plant, Cavalcanti said. Fibria is also considering selling scrubland that was being saved for future forestry use, he said.
The investment-grade rating will likely be achieved with or without the land sales at some point next year because rising pulp prices are helping the company generate free cash flow to pay off debt, he said. Fibria has generated positive cash flows for the past five quarters.
“I’m not in a hurry to sell,” Cavalcanti said. “We will only sell for the right price.”
Pulp prices will remain near a 21-month high as mill closures from Brazil to Norway, coupled with low inventories, prevent supplies from outpacing demand, Henri Philippe van Keer, Fibria’s commercial and logistics director, said in the same interview. Average prices reached $816.72 per ton in the week ended May 21, the highest since the end of August 2011, according to Helsinki- based FOEX Indexes Ltd.’s BHKP global pulp price index.
“Prices should hold at these attractive levels as demand is holding too, even amid new capacities coming online,” Felipe Silveira, an equity analyst at brokerage Coinvalores in Sao Paulo who has a hold recommendation on the stock, said by telephone yesterday.
The obligations the company plans to pay earlier with proceeds from land sales include its $1.87 billion of 2020 bonds, the company’s most costly debt with a 7.5 percent coupon. Exercising an option to buy back the securities at 103.75 cents to the dollar in 2015 would help Fibria cut average borrowing costs currently at about 4.8 percent, Cavalcanti said.
An investment-grade rating would allow Fibria to sell 10-year bonds at 4.25 percent, or one percentage point lower than investors would probably demand now, Cavalcanti said.
The biggest risk for Fibria is that it may be underestimating the impact that new plants coming online in the second half of this year may have on prices, Banco do Brasil’s Penna said. Prices of pulp to European clients may drop to about $760 a ton by December, he said.
“Plant closures are not happening at the same speed as openings, and I can’t see why pulp prices wouldn’t drop by year-end,” he said.
Fibria is also taking steps to be ready for an acquisition or an investment in a new mill by the end of next year, Cavalcanti said. An acquisition, which can be paid mostly with shares to avoid large cash disbursements and generate savings, would be more attractive than spending on a new unit, he said.
“We plan to resume growth with an eye on returns and the other on debt management,” he said. “The debt chapter will soon be a closed chapter.”
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