November 30, 2016 / 8:17 PM / 2 years ago

Fibria focuses on leverage caps as credit metrics weaken

NEW YORK, Nov 30 (IFR) - Fibria has no plans to issue dollar bonds in the near-term as it looks to put a cap on rising leverage, but it’s next deal could be Green, officials at the pulp company said on Wednesday.

The Brazilian exporter has been hit by an FX appreciation and falling pulp prices just as it heads into the second leg of a US$2bn plus expansion project.

“We have been living (through) a perfect storm,” said Guilherme Cavalcanti, the company’s CFO during a press conference at the New York Stock Exchange.

“Our leverage is 2.6 times but since we are still investing in the project, this is going to go up.”

The company, rated Ba1/BBB-/BBB-, has completed 71% of the construction on its so-called Horizonte 2 project as it looks to expand capacity and lower production costs.

Earlier this month, S&P revised the company’s outlook on its BBB- rating to negative from stable amid expectations that credit metrics were likely to deteriorate in coming months.

“The R$7.5 billion (US$2.3bn) investment is weighing heavily on Fibria’s balance sheet and cash flows,” S&P said.

It warned that leverage was likely to hit 3.7 times next year and possibly surpass 4 times if pulp prices remained at current levels and the Brazilian Real stayed at 3.3 against the US dollar.

Company policy requires management to keep net debt to EBITDA at between 2-2.5 times or up to 3.5 times during times of expansion.

“We cannot control the FX and pulp prices...(But) if we test those levels, we will make efforts to bring down leverage inside those limits,” said Cavalcanti.

A downgrade to junk territory could occur over the next 12 months if leverage exceeds 3.5 times by the end of 2017 and 3.0 times in 2018, S&P said.

Cavalcanti said that deleveraging should come quickly once the project is up and running next year thanks to a 50% and 80% increase in EBITDA and cash flow generation.

The company already has up to US$1.2bn available, mostly from committed credit lines, to cover the remaining US$1.3bn in project costs.

That doesn’t include approximately US$1bn in cash, which is sufficient to cover debt amortizations up to 2019 if necessary.

The cost of carry on much of that cash is positive as a lot of it was raised through debentures that were priced below the country’s interbank deposit rate, or CDI, Cavalcanti explained.

The issuer is looking to price another debenture next week, taking advantage of strong demand among locals who like the tax- free feature imbedded in the security.

“Our last issue came at 96% of CDI and we put it to work earning 102% of CDI,” he said. “It is like having insurance that you don’t have to pay a premium on.”

With a strong cash balance, the company has little need to tap the international markets, which have sold off following Donald Trump’s surprise victory in the US presidential elections.

“We are always looking for opportunities,” said Cavalcanti, noting that any future issuance abroad is likely to be small and mostly designed to maintain a presence among foreign accounts.

Fibria was last in the dollar market in May 2014 when it issued 2024 maturing bonds to yield 5.341% or a spread of 275bp over US Treasuries.

Yields on that bond fell to a low of around 4.55% in early October only to rise back to 5.48% on Wednesday, according to Thomson Reuters data.

“If we decide to go for a new (dollar) bond it will be a Green bond,” CEO Marcelo Castelli said. “We have all the (right) credentials.” (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)

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