NEW YORK--()--Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) of Brazilian conglomerate Camargo Correa S.A. (Camargo) at 'BB+'.
Fitch has also affirmed the following ratings:
Camargo:
--National scale rating at 'AA(bra)' ;
--BRL300 million debentures series 1 (due 2014) at 'AA(bra)' ;
--BRL700 million debentures series 2 (due 2014) at 'AA(bra)';
--National short-term credit rating at 'F1+(bra)'.
CCSA Finance Limited:
--Foreign currency IDR at 'BB+';
--Local currency IDR at 'BB+';
--US$250 million senior unsecured bonds due 2016 at 'BB+'.
CCSA Finance Limited is wholly-owned by Camargo and incorporated in the Cayman Islands. Camargo unconditionally guarantees CCSA Finance Limited's debt.
Fitch has also assigned for the first time the following ratings related to Camargo and its fully-owned subsidiaries as follows:
Camargo:
--BRL850 million debentures 4a Issuance: (due 2020) at 'AA(bra)';
--BRL600 million debentures 6a Issuance: (due 2015) at 'AA(bra)'.
Camargo Correa Investimentos Em Infra-Estructura S.A. (CCII):
--National scale rating at 'AA(bra)';
--BRL325 million 2a issuance, debentures series 1 (due 2020) at 'AA(bra)' ;
--BRL325 million 2a issuance, debentures series 2 (due 2020) at 'AA(bra)'.
VBC ENERGIA S.A. (VBC):
--National scale rating at 'AA(bra)';
--BRL1.2 billion BNDES Loan (due 2014) at 'AA(bra)'.
The Rating Outlook is Stable.
Camargo's credit ratings reflect the company's diversified portfolio of operations, solid market position in the industries in which it participates, the medium-term outlook and different degrees of cyclicality related to its core businesses, and adequate liquidity. Camargo's credit ratings also incorporate the structural subordination of the parent company debt to the debt at its operating companies, which is partially mitigated by Camargo's diversified business portfolio. Camargo relies on dividends and interest and principal payments from operating subsidiaries to service its debt. Approximately 50% of the dividends received are from companies fully controlled by Camargo.
The rating affirmation positively incorporates Camargo's recent disposal of a 6.5% stake in Usinas Siderurgicas de Minas Gerais S.A. (Usiminas) for approximately BRL2.1 billion - after paid taxes - improving the group's credit profile, as the proceeds from the mentioned transaction were used to reduce debt and improve liquidity. However, Fitch expects to see further deleveraging during the next 12 to 18 months, since as Camargo's consolidated net leverage remains weak for the rating category.
The Stable Outlook reflects Fitch's expectations that Camargo - on a standalone and consolidated basis - will improve its liquidity and capital structure during 2012 as a result of recent asset disposal and better operational performance in its core businesses resulting in improving levels of EBITDA and received dividends. The Stable Outlook also incorporates the view that the company's business strategy will focus in organic growth during 2012, and that the occurrence of a significant debt-funded transaction affecting the company's capital structure and liquidity is not expected in the near term.
Ratings under Pressure due to High Leverage:
Lack of business deleveraging at the consolidated level reaching a net leverage ratio below 3 times (x), during the next 12 to 18 months, will likely result in a downgrade. The company's consolidated net leverage by the end of June 2011 was 5.1x beyond expectations previously incorporated in the ratings. The company's consolidated EBITDA for the latest 12 months (LTM) ended June 2011 was BR2.4 billion, negatively affected by poor operational performance in the company's construction, engineering, and real estate businesses. As of June 30, 2011, the company had BRL16.4 billion and BRL4.4 billion (consolidated figures) in gross debt and cash, respectively, resulting in Camargo's net debt of BRL12.1 billion. Net leverage post asset disposal, estimated around 4.3x, remains high for the rating category.
Dividend Flow Below Expectations in 2011, Expected to Recover in 2012:
Camargo's 2011 received dividends were approximately BRL733 million, 30% below expectations previously incorporated in the ratings, primarily driven by poor operational performance in the construction business. Received dividends from Camargo's fully controlled InterCement Brasil S.A. (InterCement) and Construcoes e Comercio Camargo Correa SA (CCCCSA) are expected to be approximately BRL400 million during 2012.
On a standalone basis, Fitch views Camargo's net leverage in terms of operational flow over net debt. Camargo's operational flow for 2011 was around BRL4.5 billion, which includes assets disposal (BRL3.7 billion, Itausa transaction occurred in January 2011), received dividends (BRL733 million), and other operating expenses (BRL134 million). During 2011, Camargo's net leverage, on a standalone basis, was approximately 1.5x. For 2012, considering the recent asset disposal (Usiminas transaction) and expected improvement in received dividends at levels around BRL1.1 billion, Camargo's net leverage on a standalone basis is expected to close 2012 at around 1.2x.
Also incorporated in the ratings is the view that the assets disposal is a one-time event, and that in the medium term, in a normalized scenario excluding assets disposal, the company's net leverage should be more related to the company's ability to receive stable levels of dividends from subsidiaries. In that sense, Fitch expects to see a net debt/received dividends ratio around 2.5x after 2012.
Adequate Liquidity, Cash Expected to Remain above BRL1 billion in 2012:
Positively, the company recently improved its liquidity with the selling of non-core assets resulting in a cash position of approximately BRL1.5 billion, on a standalone basis. The company's cash position is expected to remain above BRL1 billion during 2012.
Camargo maintains an adequate debt maturity schedule. By the end of January 2012, and considering the reduction in debt of approximately BRL800 million which occurred in mid-January, the company maintained debt amortizations of approximately BRL736 million, and BRL436 million during 2012, and 2013, respectively, comfortably covered by its current cash and marketable securities balance of BRL1.5 billion. Also positive in terms of liquidity is the company's good access to local and international debt markets to improve its debt maturity schedule if required.
Cement Business's Solid Credit Profile Incorporated:
Camargo's fully controlled InterCement Brasil S.A.'s (InterCement) cash flow generation and credit profile are factored in the ratings. During the LTM June 2011, InterCement' consolidated EBITDA and EBITDA margins were BRL592 million and 22.3%, respectively. By the end of June 2011, the company's net leverage, measured by the net debt/EBITDA was 1.9X. In addition, the company's free cash flow for the LTM June 2010 was neutral to negative driven primarily by its capex plan being implemented.
InterCement's operational performance during the LTM period ended June 30, 2011 maintained its positive trend and reflects its important 10% and 45% market share in the Brazilian and Argentinean markets, respectively. Fitch views Camargo's market position as solid and sustainable in the medium term supported by the company's brand recognition (Caue and Loma Negra brands) and scale of operations, with approximately 12 million cement tons in annual sales.
Engineering & Construction Business - Weak Operational Performance:
Despite its important market position as a leading engineering and construction company in Brazil and Latin America, CCCCSA has reached weak operational performance during 2011 resulting in significant declines in EBITDA levels due to project delays as well as issues with labor cost in some projects in progress. As these issues have been resolved, the ratings incorporate the expectation CCCCSA will recover during 2012, resulting in annual distributed dividends to its parent (Camargo) of approximately BRL200 million.
Dividend Flow from Non-Controlling Business Stable:
Significant annual dividend inflow from non-controlling businesses is expected to remain stable at around BRL500 million. The ratings factor in Camargo's indirect participations of 25.6% and 17% in CPFL Energia S.A. (CPFL Energia) and Companhia de Concessoes Rodoviarias S.A. (CCR), respectively, and the expectation that the company should continue receiving significant dividend inflow from these operations. Fitch currently rates CPFL's National long-term rating at 'AA+(bra)'; Outlook Stable. CPFL's rating reflects the Brazilian energy sector's positive trend as well as the company's solid credit profile. Fitch also currently rates CCR's National long-term rating at 'AA-(bra)'; Outlook Stable. CCR's rating reflects the company's strong cash flow generation, leading position within the industry, asset diversification, and good debt amortization profile.
Rating Expectations:
The ratings consider the expectation that Camargo will further deleverage, reaching a consolidated net leverage below 3x while keeping adequate liquidity at the above-mentioned levels. Key rating drivers include the development of the Brazilian macroeconomic environment in which the company operates, operational performance of the company's core businesses, and Camargo's business strategy as to organic and inorganic growth.
Fitch would view a combination of the following as negative to credit quality that could lead to a negative rating action: the company's lack of capacity or willingness to adjust its financial strategy toward more conservative leverage targets, adverse macroeconomic trends leading to weaker credit metrics, debt-funded acquisitions, and aggressive change in its dividend payment strategy.
Considering the high leverage, Camargo ratings are unlikely to be upgraded during the next 12 months.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Parent Subsidiary Rating Linkage (Aug. 12, 2011);
--'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
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
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