Once-Wary Bondholders Now Support $2.5 Billion Fibria Expansion

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After spending the past six years reducing debt to regain its investment grade, Fibria Celulose SA is now embarking on a $2.5 billion expansion.

But far from facing push-back from bondholders, the Sao Paulo-based company is winning them over. Fibria’s $600 million of notes due in 2024 climbed to a record, pushing down yields to as low as 4.83 percent, after the company said on May 14 it will add a production line to tap into growing Chinese demand for pulp products like tissue and toilet paper.

Fibria is reassuring investors it can finance the project without selling bonds after the Brazilian currency’s plunge helped it generate record cash in the first quarter. Fibria will pay cash for as much as 40 percent of the project and get financing from lenders including state-development bank BNDES.

The “bond market tends to be bearish when companies announce big investments as they usually are funded by debt, but it’s a limited amount of debt,” Michael Roche, a New York-based fixed-income strategist at Seaport Global Holdings, said in an e-mail.

‘Very Good’

With pulp prices rebounding and the real still weak, Fibria’s net debt to earnings before interest, taxes, depreciation and amortization is unlikely to exceed 2.5 times, Chief Financial Officer Guilherme Cavalcanti said in a telephone interview.

Its leverage is currently 2.1 times, down from about four in 2011, data compiled by Bloomberg show.

“We can generate most of the cash needed to fund the project,” he said. “Fibria may be able to get the project concluded while reducing the average debt cost and extending maturities”

A 10 percent decline in the real adds about 760 million reais to Fibria’s cash flow, or 10 percent of the project’s funding needs, because most of the company’s costs are in local currency, according to Cavalcanti.

The Brazilian currency lost 1.2 percent Thursday to 3.0397 per dollar as of 12:49 p.m. in New York. It’s down 13 percent this year, the most in emerging markets.

The company, which generated 373.2 million reais of free cash in the first quarter, gets about 90 percent of its revenue from exports.

Moody’s Investors Service said on May 15 the plan to expand capacity by a third is “credit positive.” Moody’s rates Fibria at Ba1 with a positive outlook, one level below the investment grade the company has from Standard & Poor’s and Fitch Ratings.

Rating Restored

The expansion “will reinforce the company’s position as the world’s largest market pulp producer and reduce its overall production cash cost,” Moody’s said in the report.

Fibria, which was formed in 2009 after Votorantim Celulose & Papel SA bailed out Aracruz Celulose SA because of $2 billion in wrong-way currency bets, saw its net debt balloon to 11 billion reais after the acquisition, prompting rating companies to strip it of its investment grade.

The company’s 2024 bonds, which are also benefiting from a rebound in pulp prices, have gained 1.9 percent in the past month to 102.84 cents on the dollar. That compares with an average gain of 0.5 percent in emerging markets.

Benchmark pulp prices have gained 8 percent to $783.1 a metric ton since reaching a 31-month low in September as a global glut eases. Global demand for pulp will reach 42 million tons annually over the next decade from 29 million tons, mostly driven by tissue-paper consumption more than doubling in China, according to pulp and paper consultancy Poyry Oyj.

Fibria’s expansion “is a long-term investment and the company will have plenty of time to deleverage before it has to make the major disbursements,” Bernardo Rodarte, who oversees 1 billion reais ($333 million) at Sita Corretora in Belo Horizonte, Brazil, said by e-mail.

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