Research Update: Fibria Celulose S.A. Upgraded To 'BB+ From 'BB' On Debt Reduction, Outlook Stable Primary Credit Analyst: Diego H Ocampo, Buenos Aires (54) 114-891-2124; diego_ocampo@standardandpoors.com Secondary Contact: Rafaela Vitoria, CFA, Sao Paulo (55) 11-3039-9761; rafaela_vitoria@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 15, 2013 1
Research Update: Fibria Celulose S.A. Upgraded To 'BB+ From 'BB' On Debt Reduction, Outlook Stable Overview We expect Brazil-based pulp producer Fibria to continue reducing its debt in 2013 and 2014, further strengthening its balance sheet and financial risk profile. We are raising our ratings to 'BB+' from 'BB'. Under conservative price assumptions, we believe its adjusted debt-to-ebitda levels may come closer to 3.5x by 2014, while liquidity remains "strong." Rating Action On March 15, 2013, Standard & Poor's Ratings Services raised its ratings on Fibria Celulose S.A. to 'BB+' from 'BB'. The outlook is stable. Rationale The rating action reflects our expectation that Fibria's debt reduction will continue. Since the company began a new financial policy since the first quarter of 2011, which mandates to keep the leverage ratio below 3.5x, it has prepaid around $1.2 billion in debt, and we expect that trend to continue in the near future. Our base-case scenario comprises annual debt reductions of around $600 million in 2013 and 2014, and may involve a combination of internally generated cash, excess liquidity and eventually, proceeds from additional sales of non-core assets. We believe Fibria's adjusted leverage ratios may fall below 4x by year-end, and probably closer to 3.5x in 2014. In our opinion, those ratios, together with its "strong" liquidity, are consistent with our assessment of a "significant" financial risk profile and are the main drivers behind the upgrade. Expected debt levels were adjusted mainly by the addition of the present value of operating lease payments and the deduction of surplus cash (assuming variable operating cash levels, depending on forecasted working capital requirements). Our set of assumptions also includes bleached hardwood kraft pulp list prices of $740 per ton, no material changes in the company's cost position and currency exchange rate, leading to annual EBITDA generation of about $1.1 billion. Although intra-cycle price volatility is warranted in the global pulp market, WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 15, 2013 2
Research Update: Fibria Celulose S.A. Upgraded To 'BB+ From 'BB' On Debt Reduction, Outlook Stable we believe price levels in the mid-$700 area are sustainable under a scenario of a demand growth rate of more than 5%. Although there would be a significant addition to global gross hardwood capacity in 2013, some recent mill closures have partly offset that risk. We continue to consider Fibria's business risk profile as "satisfactory" based on the company's very competitive cost position, large scale, leading 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 generating 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 some concentration in few key production sites. Due to the nature of the commodity business, however, and the fact that margins are significantly affected by price fluctuations, we expect profitability to be somewhat volatile. Liquidity We believe Fibria has a "strong" liquidity, mainly due to the following: Cash sources will exceed uses by at least 1.7x for the next 12 months and at least 1.2x in the following 24 months; Net sources will remain positive, even if EBITDA were to decline by 30%; Sufficient covenant headroom under scenarios of material declines in EBITDA; Sound relationships with banks; and A good standing in credit markets. Liquidity sources for the next 12 months include Fibria's cash position of $1.6 billion and expected cash flow from operations of $900 million. The company's estimated uses of liquidity consist of debt amortization (about $560 million in the short term) and capital expenditures of about $600 million. Outlook The stable outlook assumes a successful deleveraging trend through 2014, with adjusted debt-to-ebitda ratios coming closer to 3.5x, while the liquidity remains "strong." We could upgrade the company by one notch if the leverage metric diminishes to closer to 2.5x, leaving sufficient buffer to offset price and cash flow volatility. We will also need to confirm that future investment patterns won't jeopardize the company's long-term capital structure, regardless of the nature of those investments and their attractiveness. A negative rating action could result from a significant reversal in market trends, causing Fibria to report significantly weaker credit metrics and liquidity, which we currently believe is unlikely. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 15, 2013 3
Research Update: Fibria Celulose S.A. Upgraded To 'BB+ From 'BB' On Debt Reduction, Outlook Stable Related Criteria And Research Key Credit Factors: Criteria For Rating Companies in The Global Forest Products Industry, Jan. 14, 2013 Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Ratings List Upgraded; CreditWatch/Outlook Action To From Fibria Celulose S.A. Corporate Credit Rating BB+/Stable/-- BB/Positive/-- To From Fibria Overseas Finance Ltd. Senior Unsecured BB+ 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. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 15, 2013 4
Copyright 2013 by Standard & Poor's Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 15, 2013 5