TEXT-S&P revises Fibria Celulose outlook to positive
Overview -- We expect Fibria to consistently reduce debt in the next quarters, which would help it weather volatile and potentially negative market conditions. -- We are revising the outlook to positive from 'stable and affirming the 'BB' ratings on Fibria. -- We believe that consistently lower leverage levels, the maintenance of strong liquidity, and an investment program in line with internal cash generation may lead to an upgrade in the next 18 months. Rating Action On July 6, 2012, Standard & Poor's Ratings Services revised the outlook of Brazilian pulp producer Fibria Celulose S.A. to positive from stable. At the same time, we affirmed the 'BB' ratings on the company. Rationale The outlook revision follows our expectation that Fibria's plans to continue debt reduction in the next quarters will significantly improve its financial profile. This is particularly important for the company's credit quality, as the pulp market is likely to continue experiencing volatility amid global economic turmoil and speculative trading practices from Chinese buyers. Although a weaker local currency improves Fibria's cost structure and should provide Fibria with some incremental cash flows, we project market conditions to remain somewhat challenging, especially considering competition from new entrants will increase in the next two years, putting further negative pressure on prices. Fibria has consistently made efforts to reduce leverage, which has been formalized under a financial policy that requires it to keep net debt to EBITDA below 2.5x (the ratio is calculated by deducting total cash holdings from debt), approved by the company's Board of Directors in November 2011. In that context, Fibria sold noncore assets for about $1.2 billion in 2011; finalized a (Brazilian Real) R$1.36 billion equity offering in April 2012 (about $700 million), and recently sold Bahia Produtos de Madeira S.A. for about $120 million. Our base case for Fibria suggests gross debt to EBITDA may improve toward the 4.0x level in the next two years or even less. Such leverage is consistent with our assessment of a significant financial risk profile. On a net debt basis (deducting cash balances in excess of estimated operating needs), we project these credit metrics will be even stronger, as we assume the company will sustain strong liquidity, and this may result in a one-notch upgrade. In our analysis, we have not incorporated the Tres Lagoas II investment project, as the company has not completed its studies about the project nor has it presented the project for its Board of Directors' approval. The Tres Lagoas II pulp mill could add 1.5 million tons of additional capacity but would require a total disbursement in excess of $2 billion. Although Fibria may invest in forests to secure timber for this expansion, we don't assume investments in the industrial project would occur over the next 18 months. Indeed, if Fibria decides to start investments in its Tres Lagoas II project in the next 18 months, we believe there wouldn't be much room to continue debt reduction and credit metrics would likely not improve as we currently expect. Our assessment of Fibria's business risk profile as satisfactory continue to reflect the company's very competitive cost position, large scale, leadership position in the eucalyptus pulp industry, and its strong operating efficiency. The company also benefits from a global customer base, mainly in the comparatively more resilient tissue market. As a result, we expect Fibria to continue to report higher profitability and cash flow than its global peers. These strengths are partly offset by the intrinsic risks of the capital-intensive pulp industry, which requires sizeable investments in forests and industrial facilities several years in advance of production, and the volatility of pulp prices. Liquidity We now see Fibria's liquidity as "strong," mainly because of the following: -- We expect the company's cash sources to exceed uses by at least 1.7x for the next 12 months, and at least 1.2x in the following 24 months. -- We believe its net sources would remain positive, even if EBITDA were to decline by 30%. -- We believe it would have sufficient covenant headroom under scenarios of material declines in EBITDA. -- Its relationships with banks seem to be sound. -- It benefits from a good standing in credit markets. Liquidity sources include Fibria's cash position and strong cash generation, as well as its $500 million revolving credit facility and the cash inflows coming from the equity issuance and the asset sale. The company's cash uses in 2012 consist of debt amortization (about $500 million) and capital expenditures. As we expected, Fibria successfully renegotiated the financial covenants on its bank loans, increasing maximum leverage and modifying the calculation method to minimize effects from exchange rate volatility. Outlook The positive outlook relies on our expectation that Fibria's balance sheet will get stronger through debt reduction. We believe that Fibria will reduce debt through a combination of stronger profitability and cash generation, and moderate capital expenditures (with no significant investment in expansion projects) leading to lower nominal debt levels and high cash balances. We may raise the ratings by one notch if the company's leverage shows consistent improvement toward our expectations of debt to EBITDA below 4.0x in the next years, as we also obtain more clarity on the company's investment and capital expenditure funding plan for the next three years. We believe a negative rating action is at this point unlikely, but it could result from a significant reversal in market trends to very harsh levels, causing Fibria to report significantly weaker credit metrics and liquidity than current ones. Related Criteria And Research -- Industry Report Card: Latin American Forest Products Companies Aren't Out Of The Woods, But Their Expansion Programs Should Start Generating Cash Flows Soon, June 22, 2012 -- A Drop In China's Economy Could Echo In Latin America, May 30, 2012 -- Election Results Are Unlikely To Change Business Conditions For Mexican Corporate Issuers, April 23, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Criteria For Rating The Forest Products Industry, Dec. 11, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Outlook Action To From Fibria Celulose S.A. Corporate Credit Rating BB/Positive/-- BB/Stable/-- Ratings Affirmed Fibria Overseas Finance Ltd. Senior Unsecured BB Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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