September 5, 2017 / 2:54 PM / a year ago

Fitch Rates Suzano's Proposed Reopening 'BB+'

(The following statement was released by the rating agency) RIO DE JANEIRO, September 05 (Fitch) Fitch Ratings expects to assign a 'BB+' rating to Suzano Papel e Celulose S.A.'s (Suzano) proposed notes reopening. The reopening is part of Suzano Austria GmbH 2026 and 2047 senior unsecured notes and will be unconditionally and irrevocably guaranteed by Suzano. Proceeds from these unsecured notes reopening, which is expected to total between USD300 million and USD400 million, will be used to repurchase up to USD100 million of senior notes due 2021 and to extend the company's debt maturity profile. Fitch currently rates Suzano's Foreign Currency and Local Currency Issuer Default Ratings (IDRs) 'BB+' with a Positive Outlook. Suzano's ratings reflect the company's leading position in printing and writing paper and paperboard in Brazil, and its position as the fourth largest producer of market pulp in the world. The ratings also incorporate Suzano's strong liquidity and comfortable debt amortization schedule. The Positive Outlook for the corporate ratings reflects Fitch's expectation that Suzano's FCF will remain strong in 2017 and 2018, and net adjusted leverage will decline to below 2x by 2018. An upgrade could occur if the company uses its FCF to continue reducing gross debt. The Positive Outlook also reflects Fitch's expectation that the company's strategy to decrease leverage and improve its capital structure will remain unchanged. KEY RATING DRIVERS Solid Business Position: Suzano is the leading producer of printing and writing paper in Brazil, as well as paperboard, with 1.3 million tons of annual production capacity. The company's strong market shares in uncoated printing and writing paper and in paperboard allow it to be a price leader in Brazil. With 3.5 million tons of market pulp capacity, Suzano is the fourth largest producer of market pulp in the world. Leverage Will Continue to Decline: Stronger operating cash flow and lower investments will contribute to Suzano's debt reduction efforts. Fitch expects net adjusted leverage to reduce to below 2x during 2018. Suzano's net adjusted leverage remained relatively stable during 2016 and it did not reduce to below 3.0x as previously projected due to the strong Brazilian real and weak pulp prices. Suzano's adjusted net debt /adjusted EBITDA ratio in the LTM ended June 30, 2017 was 3.2x, comparing with 3.1x at year-end 2016 and 2015. Historically, Suzano has operated with higher leverage within its Latin America peer group, with an average net adjusted leverage ratio of 3.6x between 2008 and 2011, and 4.2x between 2012 and 2016. However, in Fitch's opinion, Suzano's financial strategy approved by the Board of Directors in May 2017 demonstrates the company's commitment to leverage reduction. Operational Cash Flow to Improve: Fitch projects that Suzano will generate about BRL4.1 billion of adjusted EBITDA in 2017 and BRL4.9 billion in 2018. Key assumptions are net BEKP prices of USD550 and USD575 per ton and FX rate of 3.2 BRL/USD and 3.3 BRL/USD in 2017 and 2018, respectively. Fitch's base case scenario incorporates total investments around BRL3.5 billion during 2017 and 2018, a downward trend of costs and some efficiency gains from adjacent business projects. Suzano generated BRL3.5 billion of adjusted EBITDA and BRL2.8 billion of cash flow from operations (CFFO) in the LTM ended June 30, 2017. This compares with BRL3.7 billion of adjusted EBITDA and BRL3.1 billion of CFFO during 2016, and BRL4.5 billion and BRL2.6 billion, respectively, in 2015. FCF was BRL40 million in the LTM, after dividends of BRL371 million and investments of BRL2.4 billion, including BRL789 million from acquisition of land and forest. Forestry Assets a Key Credit Consideration: A key credit consideration that further enhances Suzano's credit profile is its ownership of about 1.2 million hectares of land, where the company developed about 575,000 hectares of eucalyptus plantations. The forestry assets are valued at BRL4.2 billion. Importantly, the region's nearly ideal conditions for growing trees make these plantations extremely efficient by global standards and give the company a sustainable advantage in terms of cost of fiber and transportation costs between forests and mills. DERIVATION SUMMARY Suzano is the leading producer of printing and writing paper in Brazil, as well as paperboard and is the fourth largest producer of market pulp in the world, after Fibria Celulose S.A. (BBB-/Stable), Celulosa Arauco (BBB'/Negative) and Empresas CMPC ('BBB'/Stable). As other Latin American pulp producers, Suzano's cash production costs are amongst the lowest in the world for hardwood pulp, ensuring its long-term competitiveness. Suzano's ratings incorporate the historical higher leverage within its Latin America peer group, and the positive Outlook reflects Fitch's expectation that the company will continue to reduce to more conservative levels in the short term. Liquidity is historically strong for the pulp producers. Suzano operating margins are similar to Fibria's and higher than the Chilean companies that also operate in lower margins business segments as tissue, packaging and boards. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Pulp sales volume of 3.6 million tons in 2017 and 3.7 million tons in 2018; --Paper sales volume between 1.2 million tons and 1.3 million tons in 2017 and 2018; --Average hardwood pulp price between USD550 and USD575 per ton. --FX rate at 3.2 BRL/USD in 2017 and 3.3 BRL/USD in 2018. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: --Maintenance of net adjusted leverage below 2.0x during low investment cycle; --Higher than expected cash generation during 2017; --A positive outlook for pulp prices in the next couple of years could also bolster the probability of positive rating actions. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action: --Weaker liquidity position; --Increase in net adjusted leverage ratio to levels above 4.0x, considering pulp prices at USD550 per ton; --Sharp deterioration of market conditions with significant reduction of pulp prices; --A debt financed acquisition; --Any change in the company's strategy to reduce leverage and improve capital structure. LIQUIDITY Suzano has historically maintained a strong cash position. As of June 30, 2017, the company had BRL3.6 billion of cash and marketable securities and total debt was BRL14.6 billion. Liquidity covered short-term debt obligations by a multiple of 1.5x. Suzano has manageable debt maturities of BRL2.4 billion in the short term and BRL935 million in the second half 2018. Suzano does not have a standby facility. The company will use proceeds from the proposed reopening to extend its debt maturity profile. FULL LIST OF RATING ACTIONS Fitch currently rates Suzano as follows: Suzano --Long-Term Foreign Currency IDR 'BB+'; --Long-Term Local Currency IDR 'BB+'; --National long-term rating 'AA+(bra)'. Suzano Austria GmbH --USD500 million senior unsecured notes, due in 2026 and guaranteed by Suzano 'BB+'; --USD300 million senior unsecured notes, due in 2047 and guaranteed by Suzano 'BB+'. Suzano Trading Ltd. --USD650 million senior notes, due 2021 and guaranteed by Suzano 'BB+'. The Rating Outlook for the corporate ratings is Positive. Contact: Primary Analyst Fernanda Rezende Director +55-21-4503-2619 Fitch Ratings Brasil Ltda. Praca XV de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP: 20010-010 Secondary Analyst Claudio Miori Associate Director +55-11-4504-2207 Committee Chairperson Daniel R. 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