Fitch Ratings has affirmed the ratings for Klabin S.A. (Klabin)
as follows:
Klabin
--Long-term foreign currency Issuer Default Ratings (IDRs) at
'BBB-';
--Long-term local currency IDRs at 'BBB-';
--Long-term national scale rating at 'AA(bra)';
Klabin Finance S.A.
--USD500 million Senior Notes, guaranteed by Klabin, due in
2024, at 'BBB-'.
The Rating Outlook for Klabin's international IDRs is revised to
Stable from Negative. The Rating Outlook for Klabin's national
scale rating remains Stable.
Klabin's ratings reflect the company's leading position in the
Brazilian packaging sector, its large forestry base that provides
it with a low production cost structure, as well as its high degree
of vertical integration, which enhances its product flexibility in
the competitive but fragmented packaging industry. The ratings also
incorporate Klabin's consistently strong liquidity position and
capacity to generate robust operational cash flow, even in diverse
macroeconomic conditions.
The revision of Klabin's Rating Outlook to Stable is a result of
the recently announced sales agreement between the company and
Fibria Celulose S.A. (Fibria), which reduces sales risk from the
new pulp mill. The Stable Outlook also reflects a positive revision
to the company's future cash flows post startup of the mill due to
a weaker Brazilian real.
Fitch expects Klabin's net leverage to peak at close to 5.0x
during the mill construction phase and then to return to below 3.0x
once it becomes fully operational. This new mill, which should
become operational in the beginning of 2016, is expected to add
about BRL1.5 billion to the company's annual EBITDA.
KEY RATING DRIVERS
Leading Position in the Brazilian Packaging Segment
Klabin is the leader in the Brazilian corrugated boxes and
coated board sectors with market shares of 16% and 50%,
respectively. In the Brazilian market, the company is the sole
producer of liquid packaging board and is the largest producer of
kraftliner and multiwall and industrial bags. The company's sales
of liquid packaging board are concentrated with one customer,
accounting for 22% of sales.
Klabin sources much of its fiber requirements from hardwood and
softwood trees grown on 237,000 hectares of plantations it has
developed on 491,000 hectares of land it owns, which assures it of
a competitive production cost structure in the future. The
accounting value of the land owned by Klabin was about BRL2 billion
as of March 31, 2015, and the value of the biological assets on its
forest plantations was BRL3.6 billion. The company's size, access
to inexpensive fiber and high level of integration relative to many
of its competitors give it competitive advantages that are viewed
to be sustainable.
Leverage to Increase Due to Heavy Investment Cycle
Klabin's capex plan will continue to be aggressive in the near
term. The company invested BRL2.9 billion in 2014 and plans to
invest about BRL6.6 billion during 2015 and 2016. Fitch projects
that Klabin's net leverage will decline to below 3.0x during 2017,
after the startup of the 1.5 million ton pulp. As of March 31,
2015, Klabin's total debt/LTM EBITDA and net debt/LTM EBITDA ratios
were 7.8x and 4.6x, respectively. These metrics compare with an
average of 5.0x and 2.9x between 2011 and 2013. The increase was
expected by Fitch and is a result of the pulp mill. The ratings
incorporate an expectation that Klabin will allow for a period of
low capex to improve its capital structure after the new pulp
mill's construction before entering into a new investment
phase.
Free Cash Flow to Remain Negative up to 2016
Klabin has been able to generate strong operational cash flow
since 2012. During the LTM ended March 31, 2015, the company
generated BRL1.7 billion of EBITDA and BRL1.9 billion of cash flow
from operations (CFFO). Free cash flow (FCF) was negative BRL1.9
billion due to investments of BRL3.4 billion and dividends of
BRL332 million. Free cash flow will remain negative in 2015 as the
company's expenses for the mill increase.
The new mill should improve operating cash flow significantly.
Klabin's sales agreement with Fibria is positive, as the company
will benefit from Fibria's scale of operations, strong client base
and logistics. Fitch projects that the new mill should generate
more than USD300 per ton of EBITDA and would add about BRL1.5
billion to the company's annual EBITDA, considering an FX rate of
BRL3.0 per U.S. dollar and a production cash cost of USD200 per ton
for hardwood pulp and USD260 per ton for softwood pulp.
Solid Liquidity Position & Manageable Debt Amortization
Klabin's solid liquidity position and low refinancing risk
remain key credit consideration. As of March 31, 2015, Klabin's had
BRL5.6 billion of cash and marketable securities and BRL13.5
billion of total debt, of which BRL2.1 billion is short term debt.
Klabin's liquidity is enhanced with BRL600 million of unused
standby credit facilities. The company's debt maturity schedule is
manageable and evenly distributed. Klabin faces debt amortizations
of BRL1.6 billion in 2015, BRL1.4 billion in 2016 and BRL1.8
billion in 2017. Fitch expects Klabin to continue preserving an
adequate liquidity position during its expansion projects,
conservatively positioning it for price and demand volatility,
which is inherent to the packaging industry.
Operational Performance to Remain Strong
Klabin's EBITDA generation should benefit from the depreciation
of the Brazilian real against the U.S. dollar, which is expected to
partially offset the slowdown in demand for packaging products and
difficulties to transfer inflation to final prices. The
concentration of sales to the food industry, which accounted for
68% of total sales in 2014, also adds stability to Klabin' sales,
as this segment is relatively resilient to the slowdown of Brazil's
economy.
Fitch projects that Klabin will generate about BRL1.8 billion of
EBITDA in 2015. The company's LTM EBITDA generation of BRL1.7
billion was an improvement from BRL1.5 billion in 2013. Klabin's
EBITDA margin of 34.4% is high for the industry and reflects its
strong market position and integrated cost structure. During 2014,
Klabin sold 1.8 million tons of paper, flat compared 2013, and 2.9
million tons of wood. Coated boards remained the company's main
source of revenues, representing 34% of the total in 2014.
Following completion of the pulp mill, Fitch projects Klabin's
EBITDA will increase to around BRL3.4 billion and that net leverage
will decline to around 2.5x using a net BEKP price of USD675 per
ton.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer
include:
--Sales volume up 4.5% in 2015 and 5% in 2016, due to higher
production capacity;
--Startup of new pulp mill in March 2016;
--Pulp cash cost of USD200 per ton for hardwood pulp and USD260
per ton for softwood pulp;
--Net leverage should be close to 5.0x before construction of
the mill would be completed;
--Negative FCF in 2015.
RATING SENSITIVITIES
Future developments that may individually or collectively lead
to a negative rating action include:
--Increase in net leverage ratios above the levels projected by
Fitch of 5.0x during the construction phase of the new mill;
--Expectation that net leverage will be above 3.0x following the
completion of its new mill;
--Delays in the construction of its new pulp mill that result in
a delay in deleveraging process;
--More unstable macroeconomic environment that weakens demand
for the company's products as well as prices;
--A debt financed acquisition.
Future developments that may individually or collectively lead
to a positive rating action include:
--Klabin's ratings are not likely to be upgraded until the
company completes its aggressive capital expenditure program;
--Another substantial equity increase would also be viewed
favorably.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and
Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
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Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985241
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Fitch RatingsPrimary AnalystFernanda
RezendeDirector+55-21-4503-2619Fitch Ratings Brasil Ltda.Praca XV
de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP:
20010-010orSecondary AnalystJay
DjemalDirector+1-312-368-3134orCommittee ChairpersonJoe Bormann,
CFAManaging Director+1-312-368-3349orMedia Relations:Elizabeth
Fogerty, +1 212-908-0526elizabeth.fogerty@fitchratings.com