S&P Lowers Outlook on Fibria Celulose S.A. (FBR) to Negative; Ratings Affirmed

November 7, 2016 12:34 PM EST
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S&P Global Ratings revised its outlook on Fibria Celulose S.A. (NYSE: FBR) from Stable to Negative. We also affirmed our 'BBB-' corporate credit rating on the company. At the same time, we affirmed our 'BBB-' issue-level rating financial vehicle, Fibria Overseas Finance Ltd.'s, bonds, which Fibria fully guarantees.

The outlook revision reflects our view that Fibria's leverage metric is likely to reach 3.7x-3.9x in 2017 and possibly exceed 4x if pulp prices remain at current levels and the Brazilian real stays at R$3.3 per $1. Such a scenario would demand additional measures to comply with the company's financial policy that mandates its leverage metric to remain below 3.5x during expansions and 2.5x in normal times.

Fibria's expansion phase aims at increasing production by almost 2 million tons per year of Bleached Eucaliptus Kraft Pulp (BEKP), bringing total annual production to around 7 million tons by 2018. The construction of the Horizonte 2 project is within the original schedule and slightly below budget, but the R$7.5 billion ($2.3 billion) investment is weighing heavily on Fibria's balance sheet and cash flows as pulp prices have dropped by $80 per ton since the company started the project. The price reduction lowered Fibria's annual internal cash flow generation by about R$1.3 billion ($400 million). In addition, the real's appreciation is curbing cash flow generation too because it reduces profitability by increasing the cost base, which is largely domestic (85% of costs). Due to these factors, we revised our assessment of Fibria's financial risk profile to significant from intermediate.

In our view, global pulp prices may rise slightly above our base-case scenario for 2017 and 2018 because demand remains vigorous and the combination of the stronger real and the lower prices is jeopardizing profitability of Brazilian producers that are at the top of the cost competitiveness ranking and command close to 40% of the global supply of market pulp from hardwood species. However, we remain cautious with our price assumptions as the global expansion of supply in 2017 is bold and may delay price recovery.

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