Fitch Affirms Fibria's IDR at 'BBB-'; Outlook Stable

RIO DE JANEIRO--()--Fitch Ratings has affirmed Fibria Celulose S.A. (Fibria) and Fibria Overseas Finance Ltd. (Fibria Overseas) as follows:

Fibria

--Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-';

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

--Long-term national scale rating at 'AA+(bra)'.

Fibria Overseas

--Long-term foreign currency IDR at 'BBB-' and withdrawn;

--USD600 million senior unsecured notes due 2024 at 'BBB-'.

The Rating Outlook for Fibria is Stable.

Fibria Overseas is a wholly owned subsidiary of Fibria and is incorporated in the Cayman Islands. Its long-term foreign currency has been withdrawn as it is not considered analytically significant due to Fibria's unconditional and irrevocable guarantee of its USD600 million senior unsecured notes.

Fibria's ratings reflect the company's excellent business position as the world's leading producer of market pulp, 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 more than 50% are directed toward the tissue paper market.

The ratings also incorporate Fibria's strong credit metrics and robust liquidity. The company's disciplined approach to reducing debt despite relatively weak market conditions is also factored into the ratings. From 2012 to 2014, the company generated more than USD1.0 billion of free cash flow (FCF) and raised about USD725 million of equity. Fibria had USD2.7 billion of net debt as of Dec. 31, 2014, which compares favorably with USD5.0 billion at the end of 2011.

Fibria's ratings also build in an expectation that the company will likely go ahead with the expansion of its Tres Lagoas mill. Capex for this mill should be around USD2.5 billion and will be concentrated in the next three years. Market conditions should continue to be challenging during 2015 and 2016 due to the startup of pulp mills in Brazil and Uruguay. Fibria's net leverage is projected by Fitch to reach 3.5x before construction of the mill would be completed, which is most likely in the second half of 2017.

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 company's leading position is viewed to be sustainable due to its ownership of 961 thousand hectares of forest assets in Brazil upon which it has developed 560 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.

Credit Metrics to Remain Strong in 2015

Fibria's 2014 EBITDA generation benefited from the depreciation of the Brazilian real against the U.S. dollar, which partially offset the average 8% reduction in pulp prices. The company generated USD1.2 billion of EBITDA, USD951 million of funds from operations (FFO) and USD268 million of FCF in 2014. Fitch expects Fibria to generate about USD1.1 billion of EBITDA and USD1.0 billion of FFO in 2015. The weakness of the Brazilian real versus the U.S. dollar and a slight increase in hardwood pulp prices supports Fitch's projection that EBITDA will remain relatively stable despite inflationary pressures, as nearly 85% of the company's costs are denominated in reais. During 2014, the company's cash cost of production declined to USD220 per ton from USD233 per ton as the Brazilian real devalued versus the U.S. dollar by an average of 10%. The new investment cycle will pressure FCF generation, which is expected to be negative about USD150 million in 2015.

Leverage to Temporarily Increase Due to New Pulp Project

Fitch's base case, which considers that the company will build a new pulp mill (Tres Lagoas II) starting on 2015 and uses net pulp prices of between USD575 and USD675 per ton during the construction period, results in net leverage reaching 3.5x. Net leverage would quickly decline to around 2.5x once the mill becomes operational in the second half of 2017. Fibria should decide during the first half of 2015 if it will go ahead with this project, which should be among the lowest cost in the world due to the high quality forestry assets around the potential mill and the favorable logistics system. Fibria had previously postponed this project, as well as an expansion of Veracel, as it sought to be a leader in the consolidation of the industry. Investments of about USD2.5 billion for the expansion project would pressure the company's FCF and temporarily increase leverage. As of Dec. 31, 2014, Fibria had a net debt/EBITDA ratio of 2.3x and an FFO net leverage ratio of 2.9x, in line with Fitch's expectations.

Robust Liquidity & Manageable Debt Amortization

Fibria had USD456 million of cash and marketable securities and USD368 million of short-term debt as of December 31, 2014. During 2014, Fibria repurchased its 2019, 2020 and 2021 notes and continued to extend its debt maturity profile with the issuance of USD600 million notes due 2024 and USD500 million syndicated loan. The company enjoys strong access to both the debt and equity markets. Fibria's liquidity is enhanced with about USD600 million (USD280 million and BRL850 million lines) unused revolving credit facility.

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, 2014, the accounting value of the land owned by the company was about BRL1.2 billion and the value of the biological assets on its forest plantations was BRL3.7 billion. Fibria has monetized portions of these holdings in the past to lower leverage and enhance liquidity. The company received BRL500 million in 2013 and BRL903 million in 2014 from the sale of land. The ratio of Fibria's net debt to the value of its biological assets at the end of December 2014 was approximately 1.2x. Considering forest plantations, its peak adjusted leverage ratios (net debt minus value of biological assets/EBITDA) would be 2.4x in 2016.

Challenging Market Conditions

Market fundamentals for pulp producers are expected to be weak in 2015 and prices should remain low. Pulp prices will continue to follow supply and demand imbalance and remain pressured by oversupply. Fitch expects more than 2 million tons per year (mty) of new hardwood pulp capacity to enter the markets during 2015, while demand growth for market pulp should be around 1.5 mty. Plant closures will be essential to returning the market to balance and improving profitability.

KEY ASSUMPTIONS

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

--Forecast considers that Fibria will go ahead with the expansion of its Tres Lagoas mill, with an estimated capex of around USD2.5 billion during the next three years.

--Net pulp prices of USD575/ton in 2015 and USD625/ton in 2016.

--Pulp sales volume flat in 2015 and 2016 at 5,300 thousand tons, reaching full capacity of 6,800 thousand tons by 2019.

--Pulp cash cost of USD220/ton.

--A key variable in Fitch's projections is that the Brazilian real remains weaker than 2.5 BRL/USD.

--Net leverage should peak 3.5x before construction of the mill would be completed.

--Negative FCF in the next three years.

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 leverage ratios above the levels projected by Fitch of 3.5x during the construction phase of the new mill;

--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.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979455

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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
Tertiary Analyst
Joe Bormann, CFA
Managing Director
+1 312-368-3349
or
Committee Chairperson
Daniel R Kastholm, CFA
Managing Director
+1 312-368-2070
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
Tertiary Analyst
Joe Bormann, CFA
Managing Director
+1 312-368-3349
or
Committee Chairperson
Daniel R Kastholm, CFA
Managing Director
+1 312-368-2070
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com