NEW YORK--()--Fitch Ratings has affirmed the ratings of Ceagro Agricola Ltda (Ceagro) as follows:
--Foreign and local currency Issuer Default Ratings (IDRs) at 'B';
--National scale rating at 'BBB(bra)';
--USD100 million senior secured notes due 2016 at 'B/RR4'.
The Rating Outlook is Stable.
The ratings affirmations reflect Ceagro's established position in the highly competitive Brazilian agricultural services sector, its strong operating margins in the high single digits, and adequate liquidity. Ceagro's net leverage of 2.3x as of March 31, 2012 is well below that of most companies rated in the 'B' rating category. This ratio partially reflects a favorable commodity environment during the past year that has led to strong demand and high prices for grain. The 'B' ratings of Ceagro despite leverage lower than most of its peers in the rating category continue to reflect the high volatility of the agriculture industry. The company's small size compared to its large and established competitors also limits the rating.
Ceagro's revenues increased by 18% in 2011 and by 9.3% in the first quarter of 2012. In spite of these increases, EBITDA declined by 4.6% during 2011 to BRL93.8 million from BRL98.3 million during 2010. In the first quarter of 2012, EBITDA decline by 7.5% to BRL31.8 million from BRL34.4 million in the same quarter last year. Higher administrative and freight costs were driving factors behind the fall in EBITDA. Ceagro's increased freight costs were not only a result of higher transportation costs in Brazil, but also reflected an increase in the volumes of transported fertilizers related to the company's bartered grain originations. Freight costs represent about 90% of Ceagro's sales expenses.
Although EBITDA levels have fallen, margins remain higher than historical levels of 3% to 5%. During 2011, the company's EBITDA margin was 9.7% and during the first quarter of 2012 it was 10.1%. The improvement of margins in the past two years is partially due to the USD100 million note issued by Ceagro in October 2010 that has boosted its working capital and improved the company's ability to source grains and negotiate prices with suppliers of transportation and fertilizers.
As of March 31, 2012, Ceagro had BRL294.7 million of total debt and BRL81.3 million of cash and marketable securities. This has resulted in an adjusted debt-to-EBITDAR ratio for the latest 12 months (LTM) ending March 31, 2012, of 3.2x and a net adjusted debt-to-EBITDAR ratio of 2.3x. These leverage levels are slightly above Fitch's expectations. The increase in leverage is partially a result of a weaker Brazilian real versus the U.S. dollar (85% of debt is U.S. dollar denominated) and increasing short-term debt through the use of ACC export related financing. Ceagro has BRL73.5 million of debt maturing during the next 12 months. Of this short-term debt, BRL60.1 million is related to ACC financing, which is self-liquidating trough export proceeds.
Ceagro's business primarily relates to the trading, transportation, and storage of grains. Physical trading volumes are facilitated by the company providing farmers with their main inputs, fertilizers, and chemicals, at planting. In return for the indirect financing of these key inputs, the farmer agrees to deliver a fixed volume of its harvest to Ceagro at predetermined prices. This business model has resulted in strong growth in trading volumes and other related services.
Trades originated through Caegro's barter system grew to 46% of revenue during 2011 from 40% in 2010, as a result of fully deploying the proceeds from the notes issued in October 2010. The amount of spot trades the company was able to originate within the limits of its working capital was not sufficient to maintain the same growth pace. Unlike trades through the barter system, spot market trades require working capital for shorter periods of time and have lower profit margins.
Fitch positively factored in Ceagro's ratings its favorable arrangement with its major storage capacity provider, Bunge, which is also its largest soy offtaker, accounting for about 36% of soy revenue in 2011. According to its contract, Ceagro has access to 500,000 tons of Bunge's storage capacity but only has to pay Bunge if it uses this space. This capacity represents about one-third of Ceagro's total storage capacity. The 'rent' is paid in part by barter with some of the soy that Ceagro stores with and later sells to Bunge. If Ceagro was to lose Bunge as a client or supplier, the impact on sale volumes and margins would be significant. This contract expires in 2013 and its extension is crucial to maintaining the rating.
In general, Ceagro has been able to maintain growth without significant investments in infrastructure, which may not be possible in the future. Of all of the storage capacity that Ceagro is currently using, only 20% is proprietary. Fitch believes that in order to maintain its recent growth pace, the company would either have to give up some of it margin gains or invest in building infrastructure, which in turn might increase the need for external financing. In the short- to medium-term, however, the company is expected to maintain growth in the high single digits and an adjusted debt-to-EBITDAR ratio at or below 3.0x.
A deterioration in Ceagro's liquidity, or an increase in the company's leverage range of 3.0x to 5.0x during the cycle could lead to a negative rating action. Leverage could increase either by weakening profitability, the launch of a large debt-financed investment program or sudden drop in trading volumes. A failure to renew the contract with Bunge could also lead to negative rating actions. Changes in its risk management, resulting in a higher exposure to commodity prices and exchange rates volatility, would also be viewed negatively. Conversely, a demonstrated ability to maintain margins in the 8%-10% level and an increase in trading volumes without disproportionately increasing leverage could result in a positive rating action.
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. 8, 2012);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria