CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' foreign and local currency Issuer Default Ratings (IDR) of Klabin S.A. The Rating Outlook for Klabin's international IDRs has been revised to Negative from Stable.
Concurrent with these rating actions, Fitch has affirmed the 'AA (bra)' national scale rating of Klabin S.A. The Rating Outlook for the company's national scale rating remains Stable.
The revision of the Ratings Outlook for Klabin's international IDRs to Negative is a result of the company's decision to proceed with the construction of a new pulp mill. The funding of this mill will be with a mix of debt and equity. The timing, however, comes in the middle of several other growth projects that could result in an increase in the company's net leverage to more than 4.0x. Market conditions during the next one to two years, as well as actions taken by Klabin's management to bolster the company's capital structure if needed, could have a negative effect on the company's ratings.
KEY RATING DRIVERS
Leading Position in the Brazilian Packaging Segment Viewed to be Sustainable
Klabin is the leader in the Brazilian corrugated boxes and coated board sectors with market shares of 15% and 30%, respectively. In Brazil's market, the company is the sole producer of liquid packaging board, and is the largest producer of kraftliner, and multi-wall and industrial bags. Tetra Pak is the sole consumer of the company's liquid packaging board, accounting for 21% of sales. Klabin sources much of its fiber requirements from hardwood and softwood trees grown on 243,000 hectares of plantations it has developed on 506,000 hectares of land it owns. 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 to Increase Due to Heavy Investment Cycle
Klabin's total debt/LTM EBITDA ratio was 4.5x and its net debt/LTM EBITDA ratio was 2.5x as of March 31, 2013. The company announced on June 11, 2013 that it will construct a pulp mill that will have an annual production capacity of 1.5 million tons of pulp that should become operational in 2016. Klabin intends to finance the BRL5.3 billion mill with BRL1.7 billion of equity and BRL3.6 billion of debt. Fitch projects construction of this mill should increase Klabin's net leverage to approximately 4.0x during 2014 and closer to 4.5x during 2015. These projected leverage levels are high for the 'BBB-' rating category. They incorporate the expectation that the company will proceed forward with several other key paper and packaging investment during this time period. Consequently, Fitch does not project that net leverage will fall to below 3.0x until 2017.
Solid Liquidity Position and Manageable Debt Amortization Schedule
Klabin's solid liquidity position is a key credit consideration. As of March 31, 2013, Klabin's had BRL2.8 billion of cash and marketable securities and BRL1.1 billion of short term debt. The company's debt maturity schedule is manageable and evenly distributed. Klabin faces debt amortizations of BRL914 million in 2014 and BRL954 million in 2015. Fitch expects Klabin to continue preserving an adequate liquidity position during its expansion projects, conservatively positioning it for price and demand volatility, which is inherent in Brazil, as well as the packaging industry.
Strong Operational Performance
Klabin's EBITDA was BRL1.3 billion in 2012. This compares with BRL1.1 billion in 2011, BRL934 million in 2010 and BRL745 million in 2009. EBITDA margins have grown to 31.8% from 25.2% during this time period. The company has improved its cash flow through cost reductions and operational improvements. The devaluation of the Brazilian real since the end of 2010 has also been a contributing factor. The continued weakness of the real during 2013 has lowered imports of packaged goods into Brazil and should positively impact the company's 2013 cash flow from operations.
Free Cash Flow Declined During 2012 due to Growth Related Projects
Klabin has been able to generate strong cash flow from operations. Cash flow from operations (CFFO) averaged BRL852 million between 2009 and 2012. Free cash flow after dividends and capex was also strong during this time period, averaging BRL225 million per year. For the LTM ended March 31, 2013, Klabin's CFFO was BRL1.1 billion, while its free cash flow was BRL72 million. Investments during this time period were BRL733 million, which compares with an average of BRL430 million during the prior four years. Key investments include a new sack kraft machine that will start operations in the fourth quarter of 2013 and a new recycled paper machine that should become operational in the second half of 2014.
Forestry Assets Are Key Credit Consideration
Further factored into Klabin's credit ratings is its large forestry base, which assures it of a competitive production cost structure in the future. As of Dec. 31, 2012, the company had 243,000 hectares of planted eucalyptus and pine forests on 506,000 hectares of land it owns. The accounting value of the land owned by the company is about BRL2.0 billion and the value of the biological assets on its forest plantations is BRL3.4 billion. The ratio of Klabin's net debt to the value of its biological assets at the end of 2012 was approximately 1.0x. Considering these assets, its peak adjusted leverage ratios (net debt minus value of biological assets/EBITDA) would be 2.9x during the years 2013 through 2016, a period in which the company's capital expenditures could exceed BRL9.0 billion.
RATING SENSITIVITIES
Klabin's ratings could be negatively affected by a significant reduction in the company's robust liquidity position or net leverage in excess of 4.0x at mid-level pulp prices. Factors that could also lead to consideration of ratings downgrades include a more unstable macroeconomic environment, which could weaken demand for the company's products as well as prices. Debt financed acquisitions would also likely lead to a negative rating action.
Klabin's ratings are not likely to be upgraded until the company completes its aggressive capital expenditure program which will run from 2013 through 2016. Upgrade considerations would include a consistent improvement in free cash flow generation capacity from the new projects, coupled with the maintenance of strong liquidity position and lower leverage through the cycle. A substantial equity increase - beyond that announced for the new pulp project - would also be viewed favorably.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 10, 2012);
--'National Ratings - Methodology Update' (Jan. 19, 2011).
Applicable Criteria and Related Research:
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793811
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.