OREANDA-NEWS. S&P Global Ratings raised its national scale rating on Suzano Papel e Celulose S. A. to 'brAA+' from 'brAA'. In addition we affirmed our 'BB+' global scale ratings on Suzano and our 'BB+' issue-level ratings on the financing vehicles Bahia Sul Holding GMBH and Suzano Trading Ltd, which Suzano guarantees. The outlook is stable. We also affirmed our '3' recovery rating on the issue-level ratings, indicating our expectation of meaningful recovery (50%-70% in the higher range of the band) of the notes under a hypothetical default scenario.

Suzano's global scale ratings continue to reflect the company's advantageous cost structure for pulp production thanks to its access to highly productive forests, efficient pulp mills and a satisfactory level of self-sufficiency in wood and energy. Furthermore, it incorporates the company's solid position in the global pulp market and Brazilian market for uncoated and coated printing and writing paper and paperboard. These factors offset pulp price volatility, which we expect to remain significant in the next few years, as well as the company's exposure to printing and writing paper products, which have been showing demand declines due to digital substitution. The national scale rating upgrade, on the other hand, is based on Suzano's improvement in its financial metrics, which result in a favorable comparison relative to other Brazilian issuers.

The stable outlook incorporates our view that Suzano's low-cost producing assets, efficient operations and reduced investment needs will support solid free-operating cash flow generation and an overall comfortable liquidity profile. It further reflects our expectation Suzano will post FFO to debt in excess of 20% and debt to EBITDA around 2.5x.

We could take a negative rating action over the coming 12 months if the company's financial metrics weaken significantly from the current level, with net debt to EBITDA of more than 3.5x-4x and FFO to net debt of less than 20%. This could happen if, for example, pulp prices decline to about $650 per ton and the foreign exchange appreciates to an average of R$3/US$, or if the company enter in an aggressive shareholder remuneration program or an important capex plan.

A higher rating is currently constrained by Suzano's financial policy which, in our view, is weaker than that of investment grade peers. In particular, for a rating upgrade, we would expect Suzano's financial risk profile to permanently strengthen and the company to have clear and sustainable financial policies, that support conservative leverage (for instance at a level of net debt to EBITDA below 3x and FFO to debt above 30%) in the medium to long term.