Fitch Ratings has affirmed the ‘BB’ foreign and local currency Issuer Default Ratings (IDRs) of Fibria Celulose S.A. (Fibria). Fitch has also affirmed Fibria’s ‘A+ (bra)’ national scale rating, as well as the debt listed at the end of the press release.
In conjunction with these affirmations, Fitch has assigned a ‘BB’ foreign currency IDR to Fibria Overseas Finance Ltd. (Fibria Overseas). Fibria Overseas is the issuer of the company’s 2019 and 2020 senior notes, which are guaranteed by Fibria. Fibria Overseas is a wholly owned subsidiary of Fibria and is incorporated in the Cayman Islands as an exempted limited liability company.
The Rating Outlook for Fibria and Fibria Overseas is Stable.
The credit ratings of Fibria reflect the company’s excellent business position, the favorable dynamics for bleached eucalyptus kraft market pulp (BEKP), and the company’s ownership of more than 1 million hectares of land in Brazil. The ratings are constrained at ‘BB’ and ‘A+ (bra)’ by Fibria’s high leverage. The ‘BB’ IDR of Fibria Overseas has been directly linked to that of its parent company Fibria through Fitch’s parent and subsidiary methodology.
Fibria is the world’s leading producer of market pulp with 5.4 million tons of BEKP capacity, nearly double the size of the second largest producer in the industry. The company has a global market share of approximately 11% within market pulp and 32% within the fastest growth segment of the market, BEKP. 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.
Fibria owns approximately 1 million hectares of land in Brazil, upon which it developed nearly 585,000 hectares of eucalyptus plantations. These assets had an accounting value of approximately BRL6 billion as of June 30, 2010. 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.
The company augments its advantage in fiber cost with large, modern pulp mills. As a result of its efficient mills and low-cost pulp wood, Fibria is one of the lowest cost producers of pulp in the world. The company uses its size and cost position to remain a price leader within the industry. Fibria’s leading position within the industry is viewed to be sustainable through the medium to long term due to large investments in forestry during the past five years by its predecessor companies, VCP and Aracruz. These investments are likely to result in the construction of more than 5 million tons of addition pulp capacity by Fibria during the next 10 to 15 years.
As of June 30, 2010, Fibria had BRL13.2 billion (USD7.4 billion) of total debt and BRL2.3 billion (USD1.3 billion) of cash and marketable securities. Approximately BRL4.1 billion of the company’s debt is denominated in Brazilian reais. Almost all of the BRL9.1 billion of foreign currency denominated debt is in U.S. dollars. Fibria faces debt amortizations of BRL2.1 billion during the next 12 months. The company should be able to repay these obligations with a mix of debt, cash, and marketable securities and cash flow from operations. Fibria has strong capital markets access and has wide access to the bank market. During the past 12 months the company has raised USD1.750 billion in the capital markets and has entered into USD1.175 billion of export prepayment facilities, USD535 million of export facilities, and USD600 million of syndicated loans.
Fitch projects that Fibria will generate about BRL 2.9 billion (USD1.650 billion) of EBITDA and BRL2.1 billion (USD1.175 billion) of funds from operations (FFO) during 2010. These figures are substantial improvements over BRL1.5 billion (USD736 million) of EBITDA and BRL 1.1 billion (USD539 million) of FFO during 2009. The improvement in cash flow is due almost exclusively to the sharp rise in pulp prices, which is due to strong demand for pulp in China, the recovery of demand in Europe, as well as supply limitations caused by strikes and the Chilean earthquake.
Fitch expects Fibria’s net debt to fall to about USD5.8 billion at the end of 2010 from USD6.2 billion at the end of 2009. This would result in a net debt-to-EBITDA ratio of 3.6 times (x) and an FFO net leverage ratio of about 3.5x. These leverage ratios continue to be relatively weak for the rating category, given the extremely high pulp prices.
Fibria is expected to continue to deleverage. The pace of deleveraging, absent the sale of its paper assets, will be somewhat constrained by significant capital expenditures related to the construction of the Horizonte II mill, which is expected to be start operations in 2014. Positively, the outlook for pulp prices during 2011 and 2012 is favorable in historical terms due to limited capacity additions and the construction of numerous paper mills in China. For 2011, Fitch projects EBITDA of more than USD1.7 billion for Fibria.
Continued elevated pulp prices or the sale of the company’s paper assets would accelerate the company’s debt reduction plan and could lead to ratings upgrades or a Rating Outlook of Positive. Factors that could lead to consideration of a Negative Outlook or downgrade include a change of management’s strategy with regard to debt reduction. Depressed pulp prices could also delay debt reduction and could lead to a negative rating action.
The issuance ratings being affirmed by Fitch at ‘BB’ are:
–Fibria Overseas Finance Ltd, 7.5%, senior notes due May 4, 2020 that are unconditionally and irrevocably guaranteed by Fibria Celulose S.A.
–Fibria Overseas Finance Ltd, 9.25%, senior notes due October 30,2019 that are unconditionally and irrevocably guaranteed by Fibria Celulose S.A.
Applicable Criteria and Related Research:
–‘Corporate Rating Methodology’ (Aug. 13, 2010);
–‘Parent Subsidiary Rating Linkage’ (July 14, 2010);
–‘National Ratings – Methodology Update’ (Dec. 18, 2006).
Applicable Criteria and Related Research:
National Ratings – Methodology Update
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage Criteria Report