Fitch Affirms Fibria's IDR at 'BBB-'; Upgrades Nat'l Scale to 'AAA(bra)'

RIO DE JANEIRO--()--Fitch Ratings has affirmed Fibria Celulose S.A. (Fibria) foreign and local currency Issuer Default Rating (IDR) at 'BBB-'. At the same time, Fitch has upgraded its national scale long-term rating to 'AAA(bra)', from 'AA+(bra)'. The Rating Outlook for Fibria is Stable. A full list of rating actions follows at the end of this release.

Fibria's ratings continue to reflect the company's excellent business position as a low cost producer of market pulp. The company also benefits from its large scale, with 5.3 million tons of bleached eucalyptus kraft market pulp capacity. The company's sales volumes are more stable than most companies within the industry, as at least 50% are directed toward the tissue paper market.

The ratings also incorporate Fibria's strong credit metrics and robust liquidity. Fibria's strong cash flow from operations (CFFO) benefited from the weakness of the Brazilian real versus the U.S. dollar during 2015, which has reduced the company's cost structure and bolstered export revenues. Stronger cash flow has accelerated the deleveraging, better positioning the company for its new investment cycle with the expansion of its Tres Lagoas mill. Fitch expects net leverage not to exceed 2.5x during the construction period, quickly declining to below 1.5x by the end of 2018.

The upgrade of the company's national scale rating was due to the strengthening of Fibria's credit profile within the corporate ratings in Brazil.

KEY RATING DRIVERS

Excellent Business Position

Fibria's ratings continue to reflect the company's excellent business position. Fibria is the world's leading producer of market pulp with 5.3 million tons of bleached eucalyptus kraft (BEKP) market pulp capacity. The new pulp mill that should become operational at the end of 2017 will add 1.75 million tons of capacity, and should be among the lowest cost in the world due to the high quality forestry assets with low average distance from forest to the potential mill and the favorable logistics system.

The company's leading position is viewed to be sustainable due to its ownership of 969 thousand hectares of forest assets in Brazil upon which it has developed 568 thousand 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.

Operational Cash Flow to Remain Strong in 2016

Fibria's 2015 EBITDA generation benefited from the depreciation of the Brazilian real against the U.S. dollar, and to lesser extent higher pulp prices. The company generated USD1.6 billion of EBITDA and USD1.3 billion of funds from operations (FFO) in 2015. Fitch expects Fibria to generate about USD1.4 billion of EBITDA and USD1.1 billion of FFO in 2016, due to slight reduction in hardwood pulp prices coupled with inflationary pressures, as nearly 85% of the company's costs are denominated in reais.

Investments of USD2.2 billion for the construction of its new pulp mill will pressure free cash flow (FCF) generation, which is expected to be negative about USD750 million in 2016. In 2015, FCF was neutral as the company invested USD706 million and distributed dividends of USD643 million, including BRL2 billion (USD500 million) of extraordinary dividends paid in December 2015. Funding for the expansion project will consist of Fibria's cash generation, BNDES, Agribusiness Receivables Certificates, Midwest Development Fund (FDCO), export prepayments and foreign export credit agency.

Leverage to Temporarily Increase Due to New Pulp Project

Fitch projects net leverage to remain below 2.5x during the construction period, quickly declining to below 1.5x by the end of 2018. Fitch's base case uses net pulp prices of between USD525 and USD575 per ton in the next three years, and exchange rates in the range of 4.3 BRL/USD to 4.5 BRL/USD. If prices were USD100 per ton higher in 2016, the company's net leverage ratio would decline to around to 1.8x. As of Dec. 31, 2015, Fibria had a net debt/EBITDA ratio of 1.9x, as per Fitch's calculations.

Forestry Assets Are Key Credit Consideration

Further factored into Fibria's credit ratings is its large forestry base, which assures it of a competitive production cost structure in the future. As of Dec. 31, 2015, the accounting value of the land owned by the company was about BRL1.6 billion and the value of the biological assets on its forest plantations was BRL4.1 billion. Fibria has monetized portions of these holdings in the past to lower leverage and enhance liquidity. In 2015, Fibria closed a transaction to buy 34 thousand hectares of land and sell 5 thousand hectares of land to Votorantim Industrial. On a net basis, the company paid BRL280 million to Votorantim Industrial.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Expansion of Tres Lagoas mill, with an estimated capex of around USD2.2 billion and startup at the end of 2017.

--Net pulp prices between USD525 and USD575 per ton during 2016-2018.

--Pulp sales volume of 5,300 thousand tons in 2016 and 2017, reaching full capacity of 7,050 thousand tons by 2019.

--No impact on EBITDA generation from sales agreement between Fibria and Klabin.

--4.3 BRL/USD in 2016 and 4.5 BRL/USD in 2017.

RATING SENSITIVITIES

Future developments that may individually or collectively lead to a negative rating action includes:

--Any change in management's philosophy toward maintaining a strong capital structure of maximum net leverage of 2.5x on the long term, with some flexibility to reach 3.5x during expansion phases;

--Increase in net leverage above 3.5x during the construction phase of the new mill, considering pulp prices at USD650 per ton;

--Sharp deterioration of market conditions with significant reduction of pulp prices;

--A debt financed acquisition.

A positive rating action is not expected in the medium term.

LIQUIDITY

Fibria has a robust liquidity and manageable debt amortization profile. Fibria had USD646 million of cash and marketable securities and USD3.2 billion of total debt, of which USD271 million is due in the short-term debt as of Dec. 31, 2015. During 2015, Fibria reduced its net debt by USD150 million with stronger cash flow generation. The company enjoys strong access to both the debt and equity markets. Fibria's liquidity is enhanced with about USD500 million (USD280 million and BRL850 million lines) unused revolving credit facility.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating action:

Fibria

--Long-term foreign currency IDR affirmed at 'BBB-';

--Long-term local currency IDR affirmed at 'BBB-';

--Long-term national scale rating upgraded to 'AAA(bra), from 'AA+(bra)'.

The Rating Outlook for the corporate ratings is Stable.

Fibria Overseas Finance Ltd

--USD600 million senior unsecured notes, due 2024 and guaranteed by Fibria, affirmed at 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998842

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998842

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Fernanda Rezende
Director
+55-21-4503-2619
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP: 20010-010
or
Secondary Analyst
Jay Djemal
Director
+1-312-368-3134
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Fernanda Rezende
Director
+55-21-4503-2619
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP: 20010-010
or
Secondary Analyst
Jay Djemal
Director
+1-312-368-3134
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com