Klabin SA, the largest cardboard maker in Brazil, is imperiling its investment-grade rating with plans to extend a borrowing binge by selling its first bonds in international markets.
Klabin hired banks to schedule meetings with investors in Europe and the U.S. starting July 7, according to a person familiar with the matter who wasn’t authorized to discuss it publicly. The talks could lead to the sale of $500 million of notes maturing in 2024, according to Fitch Ratings and Standard and Poor’s.
The 115-year-old paper producer is turning to overseas markets after having borrowed 5.9 billion reais ($2.7 billion) locally this year to help pay for a new plant that will double the company’s size in three years. Klabin’s net leverage ratio, a measure of indebtedness, will swell to as high as 4.5 times earnings in 2015, compared with the ratio of 2 times typical for Latin American corporate borrowers that share the company’s BBB- rating, according to Fitch.
“They’ll have to explain to investors how they plan to control their leverage ratio, since the project will be mostly financed by debt,” Debora Confortini, a credit analyst at Aberdeen Asset Management in Sao Paulo, wrote in an e-mailed response to questions. Any delay to the project’s completion would imperil cash flow and keep leverage elevated, she said.
Peers’ Ratings
An official at Klabin declined to comment about the bond offering and the company’s debt levels. Fitch has had a negative outlook on the rating since June 2013 while Standard & Poor’s assigned a negative outlook two months ago.
Dollar-denominated bonds from Latin American companies rated BBB- by Fitch yield 4.5 percent on average, data compiled by Bloomberg show.
The Sao Paulo-based company is the only major Brazilian pulp producer still deemed investment grade by at least two ratings companies. Three years ago, Suzano Papel & Celulose SA was cut to junk as it embarked on a $3 billion expansion plan that made it Latin America’s most-indebted pulp maker. In 2009, Fibria Celulose SA lost its investment-grade rating amid $2.1 billion in derivatives losses.
Klabin’s new plant, 444 kilometers (275 miles) southwest of the company’s headquarters, will have an annual production capacity of 1.5 million tons of pulp. About 26 percent of its output will be used to produce diapers and sanitary pads, according to information on Klabin’s website.
The company’s ratio of net debt relative to earnings before interest, taxes, depreciation and amortization was two times at the end of the first quarter, according to Fitch.
Pulp Prices
“The negative outlook is to remind them they have high leverage for the rating category during the expansion project,” Joe Bormann, a managing director at Fitch in Chicago, said in a telephone interview. “They don’t have a lot of breathing room for additional” capital expenditures.
Benchmark pulp prices have fallen 4.3 percent in 2014 to $736.83 a metric ton, extending a slump over the past year to 9.3 percent, according to Helsinki-based FOEX Indexes Ltd.’s BHKP index. Klabin will have to show it has a plan to cope with a further decline in prices once its new plant starts running, according to Aberdeen’s Confortini.
Brazil’s real fell 0.1 percent to 2.2130 per dollar at 1:25 a.m. in New York.
Lowest Ratio
Altair Pereira and Caio Lombardi, credit analysts at Banco Bradesco SA, are less concerned than peers about the company’s rising debt levels. While Klabin’s leverage will rise, the company still has the lowest ratio in the industry and it’s better positioned for growth than rivals because it makes finished paper products in addition to producing pulp, they said.
“We have a positive view of Klabin given the greater market resilience to the products offered by the company in a scenario of weaker demand,” they wrote in a report to clients dated June 20.
The company’s net income tripled in the first quarter to 607 million reais.
The company has to show the market it can manage the leverage ratio, according to Victor Penna, a paper and pulp industry analyst at the brokerage unit of Banco do Brasil SA in Sao Paulo.
“They also need to make clear how they plan to deal with a possible oversupply of pulp in the next couple of years, and what impact that would have on their numbers,” he said in a telephone interview.
Bloomberg
