Suzano

Fixed Income team

17 June 2021| Recent thinking

Sao Paolo-based pulp and paper producer Suzano is a holding in the Federated Hermes Unconstrained Credit Fund. Alongside our colleagues in our stewardship business (EOS at Federate Hermes), we engaged with the company on ESG issues including governance, greenhouse-gas emissions, energy efficiency, water consumption and sustainability disclosures.

In 2018, Suzano acquired its second-biggest competitor in the Brazilian market, pulp producer, Fibria. This was a cash and shares transaction and required Suzano to take on an additional $9.2bn in debt. This led to a rise in its net leverage to 3.1x in USD at end of the year.

Although many investors could have seen the acquisition as a growth story involving greater financial risk, we saw the situation differently. The real potential for Suzano’s business profile to improve, combined with strong cash flows, well-signposted financial policy and potential benefits through synergies, meant that we took a positive view on the company’s credit profile.

Credit-rating agencies agreed. Standard & Poor’s, for instance, upgraded Suzano to investment-grade status immediately after the merger.

Today, the company is strengthening its disclosure on impacts concerning water, raw materials, energy, chemicals use. It has recently issued a sustainability-linked bond.

Looking ahead, we see opportunity in three key ESG-related areas:

The new bio-economy as a principal long-term commercial driver (SDG 9)
Sustainable forestry ecosystems management; carbon sequestration to get from net zero to net negative (SDGs 13, 15)
Enhancing land-based community livelihoods in areas of operation (SDGs 8, 11, 17)