SÃO PAULO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB-' foreign and local currency Issuer Default Rating (IDR) to Biosev S/A (Biosev), as well as a national scale rating of 'A+ (bra)'. The Rating Outlook for Biosev is Stable.
Fitch has also assigned a 'BB-' rating to Biosev Finance International B.V.'s (Biosev Finance) proposed senior unsecured notes of approximately USD500 million, subject to market conditions, which will be unconditionally guaranteed by Biosev and Biosev Bioenergia S/A. Net proceeds will be used to debt refinancing.
Biosev's ratings reflect the company's large crushing capacity combined with a differentiated business model built on clusters, which, together with its affiliation with Louis Dreyfus Commodities Group (LDC Group) offers significant competitive advantages within the sugar & ethanol industry in Brazil. Fitch considers this affiliation as positive, as it brings operational and financial benefits to the company on top of its capacity to take advantage of LDC Group's proven expertise in the global agricultural commodities market. Biosev's aggressive expansion via acquisitions that have been financed with a mix of debt and equity and challenges related to the integration of the assets and to recover profitability currently constrain the ratings.
The ratings also incorporate Biosev's moderate leverage within the sector as well as its manageable debt profile and modest liquidity position. Biosev's main challenge in the medium term lies in its capacity to cope with negative free cash flow generation (FCF), which should remain pressured by its required large capex program aimed at increasing cane quality yields (measured as kilograms of total recoverable sugar per ton of cane crushed, and currently below the industry average), and raise capacity utilization. The ratings also consider the company's exposure to the inherent risks of the agribusiness sector and the expected volatility of its cash flow generation.
Large-Scale and Business Clusters
Currently, Biosev has the second largest crushing capacity of the Brazilian sugar and ethanol industry (37.9 million tons spread over 12 mills) with prominent storage capacity for both products. Its storage capacity allows the company to sell its products at more favorable moments. The organization of its industrial and agricultural assets around clusters generates operating synergies as well as secures an adequate supply of sugar cane to its mills, helping to fend off potential competitors by imposing high barriers to entry. The mills and cane fields are located in regions with access to good quality land for the planting of sugar cane, being near Brazil's main consumer centers and having efficient logistics access to port terminals. The company produces a broad portfolio of products and some of its plants are able to export ethanol to the United States, which can translate into considerable gains in the future.
M&A-Driven Growth Strategy
Biosev has a track record of aggressive growth through acquisition. The company expanded fast, as it went from a total capacity of 900,000 tons to the current 37.9 million in less than 10 years. Achieved mostly through acquisitions, 11 out of Biosev's 12 mills were acquired from their former owners and only one is a Greenfield developed by the company. Biosev's business development plan contemplates the possibility of an ongoing consolidation process based on acquisitions of mid- to small-sized mills (or only their biological assets) inside the already existing clusters. Though this strategy opens up the opportunity for further scale gains and cost dilution, it also increases future integration and execution risks, as the company is already assimilating the acquisition of Santa Elisa Vale Group (SEV).
Fitch expects that the company will carefully manage its growth strategy going forward in 2014 in order to avoid pressure on its capital structure and, consequently, on its ratings. Biosev is expected to be more selective in seeking new acquisitions in the short term to capture synergies and further improve its cash flow generation; new debt-financed acquisitions or significant cash disbursements may pressure credit quality.
Affiliation with the Louis Dreyfus Commodities Group
The affiliation with LDC Group translates into positive synergies and gives Biosev access to a broad range of data and information on the current shape of the sugar and ethanol global markets, inventory and demand levels for both products, price trends, and the performance of foreign currencies across the globe, among others. The LDC Group is also the main client for the sugar produced by Biosev. The adoption of efficient risk management practices has been reflecting positively on the attractive level of hedged sugar prices (USD20.90 cents/lb for the 2013/14 season, as of June 30, 2013) and has also helped to reduce the impact of the recently intense FX volatility.
Modest Liquidity; Manageable Debt Profile
Biosev has a modest liquidity position. As of June 30 2013, its cash and marketable securities amounted to BRL1 billion and covered 69% of its short-term debt under Fitch's criteria. The ratio above does not include the proceeds received from the LDC Group in the form of advances for future delivery of very high polarization (VHP) sugar, which should be treated as inter-company loans used in the financing of Biosev's working capital needs. However, given its inter-company nature this debt has lower refinancing risk when compared to regular bank debt. Fitch understands that Biosev will be able to manage its debt maturity profile efficiently by issuing new debt and matching debt maturities to its expected cash flow generation.
In Fitch's view, the company has to improve cane quality yields and reduce idle capacity of its mills with an aim toward cutting fixed costs. Biosev's capacity to keep increasing revenues has been somewhat offset by operating margins that are relatively low compared to the size and scale of its operations. In the latest 12 months (LTM) through June 30 2013, net revenues amounted to BRL4.3 billion and EBITDAR reached BRL1.7 billion, bringing the EBITDAR margin to 39.1%. Given the large investments needed to improve productivity and capacity utilization, FCF should remain pressured until at least 2016/2017. In the LTM June 30 2013, cash flow from operations (CFFO) amounted to BRL1.1 billion and capex was BRL1.2 billion, leaving the FCF in negative territory at BRL165 million. Despite the prospect of negative FCF for the near future, Fitch believes that the company will be able to keep leverage ratios adjusted for land lease obligations within levels ranging from 3.5x to 4.5x over the next five years. In the LTM June 30 2013, the adjusted net debt-to-EBITDAR stood at 3.6x.
A negative rating action could take place if the company fails to improve its liquidity position as planned and if the adjusted net debt-to-EBITDAR ratio increases. Moreover, a negative rating action could occur if margins do not react positively to all the measures taken by Biosev to increase agricultural yields and boost capacity utilization. A positive rating action could occur should the company succeed in improving liquidity and bringing leverage down to its targeted levels.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' dated Aug. 8, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage