January 11, 2017 / 5:40 PM / 7 months ago

UPDATE 3-Brazil's Fibria drops controversial covenant language

(Adds comments from the company)

By Paul Kilby

NEW YORK, Jan 11 (IFR) - Brazilian pulp and paper company Fibria dropped controversial language on a 10-year Green bond on Wednesday amid strong investor pushback, sources told IFR.

Fibria was one of several companies this week to drop the aggressive terms, which make it easier for borrowers to breach covenants without offering investors compensation.

Fibria's Treasurer Marcelo Habibe told IFR that lawyers had suggested including the new language as part of the "natural process of improvement in the documentation for investment grade companies."

But with key accounts refusing to place orders if the terms remained, Fibria saw no benefit in keeping the contentious wording especially if it impacted demand, and perhaps pricing.

"That's why we decided to take it out," Habibe said. "If those big investors who said they were uncomfortable with the clause hadn't placed their orders, we probably would have (got) a worse price."

Leads on the Fibria deal told their sales forces to inform investors that the language would be removed and this would show up in the final pricing supplement, said a source with knowledge of the deal.

Aside from Fibria, Brazilian bioenergy company Raizen and the Santiago Metro have also included such language in bonds being marketed to investors this week, according to Covenant Review.

"We don't want this to become standard language because it takes away some big protections for bondholders," said Dan Senecal, an emerging market credit analysts and portfolio manager at Newfleet Asset Management.

"There is going to be a lot of push back on it from the buyside."

Ultimately leads were able to ratchet in pricing a good 30bp from start to finish, with orders reaching around US$2.5bn by early Wednesday, according to one investor.

In the end, the US$700m deal was priced to yield 5.70%, the tight end of guidance of 5.75% area (+/- 5bp) and well inside initial price thoughts of very low 6%.

Final yields fell in line with the 5.60%-5.70% fair value calculated by one banker who spotted the outstanding 5.25% 2024s at 5.20%.

Some investors, however, sought higher levels from a company that is border line junk. It is already rated Ba1 by Moody's and has a negative outlook from S&P, which rates the company BBB-.

While Fibria is broadly seen as a strong credit, some investors thought a better comp was the lower rated Brazilian pulp and paper name, Suzano Papel e Celulose.

"If Fibria gets downgraded, you might as well buy Suzano, though Fibria is a lower cost (pulp producer) and less volatile," said an investor.

Suzano, which is rated Ba1/BB+/BB+, has a 2026 Green bond trading at 6.24%-6.10%, according to Thomson Reuters data. (Reporting by Paul Kilby; Editing by Natalie Harrison and Shankar Ramakrishnan)

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