Fitch Affirms Klabin's Ratings at 'BBB-'; Outlook Negative
The revision of the Rating Outlook to Negative reflects high leverage post the completion of the new Puma pulp mill that started operations in March. Fitch's base case expectation is that Klabin's net leverage will reduce to close to 3.0x by the end of 2017. If the company decides to go forward with USD900 million of capex for a new coated board machine, its deleveraging would be delayed beyond Fitch's base case expectation and Fitch would downgrade Klabin's ratings out of investment grade.
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 20% of sales. Klabin sources much of its fiber requirements from hardwood and softwood trees grown on 235,000 hectares of plantations it has developed on 489,000 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 Dec. 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 Expected to Gradually Reduce
Klabin's leverage is high and above Fitch's expectation that net leverage would peak at close to 5.0x during the mill construction phase. Fitch expects Klabin's net leverage to reduce to about 3.0x by the end of 2017 due to cash flow associated with the new pulp mill, which should generate about USD300 per ton of EBITDA and would add about BRL1.7 billion to the company's annual EBITDA, considering an average FX rate of BRL3.9 per U.S. dollar and an average production cash cost of USD200 per ton. Fitch's base case scenario incorporates a period of lower capex before entering into a new investment phase during 2019 and 2020. Investments of BRL7.6 billion in 2014 and 2015 and the impact of the Brazilian real devaluation on the company's dollar denominated debt contributed to a sharp increase in net leverage to 6.5x during the latest 12 months (LTM) ended March 31, 2016.
Free Cash Flow Positive in 2017
Fitch projects that Klabin will generate about BRL3 billion of EBITDA in 2016 and BRL3.7 billion in 2017, and considers a net BEKP price of USD550 per ton. Free cash flow (FCF) will remain negative in 2016 as investments should amount to BRL2.6 billion during the year, including residual investments of BRL1.9 billion in the Puma project. The new mill should improve operating cash flow and result in BRL2 billion of FCF between 2017 and 2018. During the LTM ended March 31, 2016, the company generated BRL2 billion of EBITDA and BRL1.4 billion of funds from operations (FFO). FCF was negative BRL2.9 billion due to investments of BRL4.5 billion and dividends of BRL498 million.
Operational Performance to Remain Strong
Klabin's EBITDA generation benefited from the depreciation of the Brazilian real against the U.S. dollar, partially offsetting the slowdown in demand for packaging products. The company's strategy to redirect sales to exports was positive, and demonstrated Klabin's flexibility and diversification of product lines. Exports increased to 32% of Klabin's sales in 2015, compared with 25% in 2014. The concentration of sales to the food industry also adds stability to Klabin's sales, as this segment is relatively resilient to the slowdown of Brazil's economy. Klabin's EBITDA margin of 33.7% is high for the industry and reflects its strong market position and integrated cost structure. During 2015, Klabin sold 1.8 million tons of paper, flat compared 2014, and 3.2 million tons of wood. Coated boards remained the company's main source of revenues, representing 37% of the total in 2015.
Fitch's key assumptions within its rating case for the issuer include:
--Sales volume excluding pulp up 5% in 2016 and flat in 2017;
--Pulp sales volume of 850 thousand tons in 2016 and 1.4 million tons in 2017;
--Average pulp cash cost of USD200 per ton;
--Net leverage between 3.0x and 3.5x by the end of 2017;
--Annual investments between BRL800 million and BRL1 billion in 2017 and 2018;
--Positive FCF in 2017;
--3.9 BRL/USD in 2016 and 2017.
Future developments that may individually or collectively lead to a negative rating action include:
--Expectation that net leverage ratio will remain above 3.5x in 2017;
--More unstable macroeconomic environment that weakens demand for the company's products as well as prices;
--A debt financed acquisition.
A positive rating action is not expected in the medium term.
Klabin's solid liquidity position and low refinancing risk remain key credit consideration. As of March 31, 2016, the company had BRL5.9 billion of cash and marketable securities and BRL18.7 billion of total debt, of which BRL2.4 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 BRL1.5 billion in 2016, BRL2.4 billion in 2017 and BRL2.5 billion in 2018. Fitch expects Klabin to continue preserving strong liquidity, conservatively positioning it for price and demand volatility, which is inherent to the packaging industry.
FULL LIST OF RATING ACTIONS
--Long-Term Foreign Currency IDR affirmed at 'BBB-', Outlook Negative;
--Long-Term Local Currency IDR affirmed at 'BBB-', Outlook revised to Negative from Stable.
Klabin Finance S.A.
--USD500 million senior notes, guaranteed by Klabin, due in 2024, affirmed at 'BBB-'.