CHICAGO--()--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 ratings upgrades.
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 rating action.
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