Fitch Ratings has assigned a ‘B+/RR4(EXP)’ rating to the proposed 2023 notes to be issued by Eldorado Intl. Finance GmbH, and guaranteed by Eldorado Brasil Celulose S.A. (Eldorado) and Cellulose Eldorado Austria GmbH. Proceeds from these senior unsecured notes, which are expected to total USD500 million, will be used to extend the company’s debt maturity profile.
The rating reflects Eldorado’s stronger cash flow due to the depreciation of the Brazilian real during 2015, which accelerated the deleveraging of the company’s balance sheet. The ratings incorporate that Eldorado will likely enter into a new investment cycle and leverage will temporarily increase during 2017 and 2018. After 2019, a fast deleveraging is expected due to stronger cash flow generation capacity from the second pulp mill. Eldorado has a manageable liquidity, and Fitch expects an improvement in the company’s liquidity and lower refinancing risk. Eldorado’s limited financial flexibility from its forest base was also incorporated in the analysis.
KEY RATING DRIVERS
Operational Cash Flow Improved
Eldorado’s EBITDA generation benefited from the depreciation of the Brazilian real against the U.S. dollar, and to lesser extent higher pulp prices. In the latest 12 months (LTM) ended March 2016, Eldorado generated BRL1.7 billion of EBITDA, compared to BRL592 million reported in 2014. Fitch expects EBITDA to be stable at BRL1.7 billion in 2016, considering net pulp prices of USD550/ton. The company’s cash flow generation is still strongly affected by high financial expenses due to high indebtedness with cash flow from operations (CFO) at BRL845 million in the LTM ended March 2016.
Investments of about BRL10 billion for the construction of its new pulp mill will pressure free cash flow (FCF) generation, which is expected to be negative until 2019. In the LTM ended March 2016, FCF was positive at BRL319 million, after investments of BRL526 million. Expected funding for the expansion project should consist of BRL7 billion of debt from the Brazilian Development Bank (BNDES), Midwest Development Fund (FDCO), foreign export credit agency and FGTS, and BRL3 billion of equity. Fitch’s base case projections considered that Eldorado will not proceed with the expansion project without the equity contribution.
Leverage to Increase Due to New Pulp Project
Eldorado’s leverage reduced faster than expected due to stronger operational cash flow. In the LTM ended March 2016, net debt/EBITDA was 4.9x, a reduction compared with 5.2x in 2015 and 12.6x in 2014, as per Fitch’s methodology. As of March 31, 2016, Eldorado reported total debt of BRL8.9 billion, with strong participation of BNDES (44% of total debt). Fitch’s base case projections considered that Eldorado will build a second pulp production line, with a production capacity of 2.3 million tons, preventing the company from deleveraging in the medium term. With investments of BRL10 billion, including an equity portion of BRL3 billion with the remainder comprised of new debt, Fitch expects net leverage to peak at 7.7x in 2018. A quick deleveraging is expected once the new mill becomes operational.
Dependence on Third Party Wood Still High
Eldorado exhibits state of art technology and high productivity at its mill, with an annual production capacity of 1.7 million tons of hardwood pulp. Eldorado’s cash cost is in line with its peers in Brazil, although the company has high dependence of wood from third parties and longer average distance from the forest to the mill. Eldorado also has some financial flexibility from its forest base, with the accounting value of the biological assets of its forest plantations of BRL1.8 billion as of March 31, 2016. 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.
Fitch’s key assumptions within our rating case for the issuer include:
–Net pulp prices between USD550 and USD575 per ton during 2016-2019;
–Pulp sales volume of 1.65 million tons in 2016 and 1.7 million tons in 2017;
–Startup of the new pulp mill in 2019, with an additional pulp sales volume of 1.4 million tons in 2019, reaching full capacity in 2020;
–Investments of BRL1.3 billion in 2016, BRL5.4 billion in 2017 and BRL4 billion in 2018;
–Equity increase of BRL3 billion during 2016-2018.
Future developments that may individually or collectively lead to a negative rating action include:
–Expectation that leverage will not quickly reduce after the startup of the new pulp mill;
–Liquidity falling to levels that considerably weaken short-term debt coverage.
Future developments that may individually or collectively lead to a positive rating action include:
–Rating upgrades are not expected until the company concludes its new investment cycle;
–Faster than expected deleveraging if Eldorado decides not to proceed with the investments for the construction of the second pulp production line, resulting in higher than expected free cash flow generation.
Liquidity is manageable. As of March 31, 2016, cash and marketable securities was BRL727 million and short-term debt was BRL2.7 billion, including about BRL1.2 billion of pre-export financing. Eldorado has BRL833 million of debt maturing from April to December 2017 and BRL1.2 billion in 2018. The reduction in the company’s cash reserves, compared to a cash position of BRL1.4 billion at the end of 2015, was due a loss from derivatives transactions of BRL746 million during the first quarter of 2016. In 2015, Eldorado reported gains from derivatives transactions of BRL1.7 billion. In Fitch’s opinion, Eldorado’s hedging strategy is aggressive and speculative. Fitch expects the company to refinance part of debt maturities and new intercompany loans are not expected, but will depend on Eldorado’s access to the market to extend debt amortization profile.
FULL LIST OF RATING ACTIONS
Fitch assigns the following rating:
Eldorado Intl. Finance GmbH
–Proposed senior unsecured notes, up to USD500 million, and up to seven years ‘B+/RR4(EXP)’.
Transaction will be issued by Eldorado Intl. Finance GmbH and guaranteed by Eldorado Brasil Celulose S.A. and Cellulose Eldorado Austria GmbH.
Fitch currently rates Eldorado Brasil Celulose S.A. as follows:
–Long-Term Foreign Currency IDR ‘B+’;
–Long-Term Local Currency IDR ‘B+’;
–Long-Term National Scale ‘BBB+(bra)’.
The Rating Outlook for the corporate ratings is Stable.
Summary of Financial Statement Adjustments