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Fitch Upgrades Fibria; Outlook Revised to Stable

February 26, 2014

Fitch Ratings has upgraded Fibria Celulose S.A. (Fibria) and Fibria Overseas Finance (Fibria Overseas):


--Long-term foreign currency Issuer Default Rating to 'BBB-' from 'BB+';

--Long-term local currency IDR to 'BBB-' from 'BB+';

--Long-term national scale rating to 'AA+(bra)' from 'AA-(bra)'.

Fibria Overseas

--Long-term foreign currency IDR to 'BBB-' from 'BB+';

--USD63 million senior notes due 2019 to 'BBB-' from 'BB+';

--USD690 million senior notes due 2020 to 'BBB-' from 'BB+';

--USD561 million senior notes due 2021 to 'BBB-' from 'BB+'.

The Rating Outlooks for Fibria and Fibria Overseas have been revised to Stable from Positive.

The upgrade of Fibra's ratings to investment grade reflects the company's disciplined approach to reducing debt during the past two years despite relatively weak market conditions. During this time period, the company generated more than USD800 million of free cash flow and raised about USD650 million of equity. Fibria had USD4.1 billion of total debt as of Dec. 31, 2013 and USD3.1 billion of net debt. These figures compare favorably with USD6.1 billion of total debt and USD5 billion of net debt at the end of 2011.

About USD200 million of the debt reduction was due to Fibria's decision to sell approximately 210,000 hectares of land to Parkia Participacoes for a potential BRL1.650 billion, of which BRL500 million was received in Dec 2013. The upgrade of Fibria's ratings was not a result of the decision by the company to sell this land, as Fitch viewed that transaction as monetizing assets that were used to support the existing ratings.

Fitch's upgrade of Fibria's ratings builds in an expectation that the company will likely go ahead with the expansion of its Tres Lagoas mill. Capex for this mill should be around USD2.5 billion and will be heavily concentrated in 2015 and 2016. Market conditions should continue to be challenging during 2014 and 2015 due to the startup of pulp mills in Brazil and Uruguay. Fibria's net leverage is projected by Fitch to reach 3.0x before construction of the mill would be completed, which is most likely in the first half of 2017.

Key Rating Drivers

Declining Leverage and Absolute Debt Levels

Fibria's EBITDA generation benefited from higher pulp prices and depreciation of the Brazilian real against the USD. The company generated USD1.3 billion of EBITDA and USD794 million of funds from operations in 2013. Management initiatives have led to USD1.9 billion of net debt reduction since the end of 2011 despite difficult market conditions. The company's proactive steps to reduce leverage included the issuance of USD658 million of equity. Fibria ended 2013 with a net debt/EBITDA ratio of 2.4x and an FFO net leverage ratio of 3.9x. These ratios compare favorably versus 3.4x and 4.7x, respectively, in 2012. Fibria's net leverage at the end of 2013 would have been 2.6x if proceeds from the sale of forestry land to Parkia had been excluded.

Excellent Business Position

Fibria's ratings continue to reflect the company's excellent business position. It is the world's leading producer of market pulp with 5.3 million tons of bleached eucalyptus kraft (BEKP) market pulp capacity. Fibria's sales volumes are more stable than most companies within the industry, as more than 50 percent of its sales are directed toward the tissue paper market. The company's leading position is viewed to be sustainable due to its ownership of 967 thousand hectares of forest assets in Brazil upon which it has developed 561 thousand hectares of eucalyptus plantations. The nearly ideal conditions for growing trees in Brazil make these plantations extremely efficient by global standards and give the company a sustainable advantage in terms of cost of fiber and transportation costs between forest and mills.

Challenging Market Conditions

2014 and 2015 are projected to be difficult for the pulp market and pricing pressure could intensify following the pipeline of new projects. Combined, these mills will expand supply by about 9 percent in a market where demand is struggling to grow by more than 2 percent. In 2013, pulp prices were better than forecasted due to some delays in the scheduled startups of new mills and closure of about 1 million tons of market capacity, along with increased demand for pulp from China and North America and a slow recovery in other parts of the world.

Credit Metrics to Remain Strong in 2014

Fitch projects that Fibria will generate about USD1.3 billion of EBITDA and USD1.1 billion of FFO in 2014 and that net leverage will decline to around 2.0x. This level of EBITDA is similar to 2013 despite Fitch's projection that the company' net pulp price received should decline to USD600 per ton in 2014 from USD618 in 2013. The weakness of the Brazilian real versus the U.S. dollar is a key variable in Fitch's projection that EBITDA will remains steady despite declining pulp prices as nearly 85 percent of the company's costs are denominated in reais. During 2013, the company's cash cost of production declined to USD200 per ton from USD220 per ton as the Brazilian real devalued versus the U.S. dollar by 17 percent. With capital expenditures projected to be USD600 million and no dividend distributions, Fibria should generate about USD450 million of free cash flow. The company will also receive about USD375 million from the sale of land that could be used to reduce debt.

Pulp Project to Temporarily Elevate Leverage

Fibria will decide during 2014 if it will build a new pulp mill, Tres Lagoas II. Fitch's base case projection is that the company will proceed with the project given its cost structure, which should be among the lowest cost in the world due to the high quality forestry assets around the potential mill and the favorable logistics system. Fibria had previously postponed this project, as well as an expansion of Veracel, as it sought to be a leader in the consolidation of the industry. Investments of about USD2.5 billion for the expansion project would pressure the company's free cash flow and temporarily increase leverage. Fitch base case, which uses net pulp prices of between USD600 and USD680 per ton during the construction period, results in net leverage reaching 3.0x. Net leverage would quickly decline to around 2.0x once the mill became operational. A key variable in Fitch's projections is that the Brazilian real remains weaker than 2.5 BRL/USD.

Robust Liquidity

Fibria had USD1 billion of cash and marketable securities and USD1.3 billion of short term debt. Excluding the 2020 notes that will repurchased in March 2014, the company has debt maturities of about USD635 million in 2014 and USD350 million in 2015. The company enjoys strong access to both the debt and equities market. Fibria's liquidity is enhanced with about USD630 million (USD500 million and BRL300 million lines) unused revolving credit facility. The company also has land with an accounting value of USD530 million and forestry plantations on this land that an accounting value of USD1.450 billion. Fibria has monetized portions of these holdings in the past to lower leverage and enhance liquidity. The company received BRL500 million in December 2013 and BRL605 million in January 2014 from the sale of land and will receive an additional BRL298 million up to March.

Rating Linkage

The 'BBB-' IDR of Fibria Overseas Finance (Fibria Overseas) has been directly linked to that of its parent company, Fibria, through Fitch's parent and subsidiary methodology. Fibria Overseas is the Cayman Island-domiciled issuer of the guaranteed 2019, 2020, and 2021 senior notes.

Rating Sensitivities

Any change in management's philosophy toward maintaining a stronger capital structure would be viewed negatively and could lead to a negative rating action. A significant increase in leverage ratios, above the levels projected by Fitch, and/or a sharp deterioration of market conditions could also pressure the classification. A debt financed acquisition could also lead to a downgrade. A positive rating action is not expected in the medium term.

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