RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has upgraded Localiza Rent a Car S.A.'s (Localiza) ratings as follows:
--Foreign currency Issuer Default Rating (IDR) to 'BBB' from 'BBB-';
--Local currency IDR to 'BBB' from 'BBB-'
--Long-term National Scale Rating to 'AAA(bra)' from 'AA+(bra)';
--Unsecured fifth and sixth debenture issuance to 'AAA(bra)' from 'AA+(bra)'.
Fitch has simultaneously assigned an 'AAA(bra)' rating to Localiza's unsecured seventh debenture issuance due in 2021 in the amount of BRL500 million. The proceeds from the issuance will be used to refinance debt and to support working capital requirements.
The Outlook for Localiza's corporate ratings has been revised to Stable from Positive.
The upgrade reflects Localiza's proven ability to adjust its business model to consistently allow financial flexibility to withstand changes in the economic cycle while preserving its healthy capital structure and credit metrics. Fitch's expects that Localiza's performance will weather the current environment of slower economic growth without damaging its consistent performance and credit metrics.
Localiza's 'BBB' rating reflects its distinguished and dominant business position within the car and fleet rental industry in Brazil, its strong operational efficiency, as well as its track record of a conservative capital structure combined with robust liquidity levels. Localiza's sizable pool of unencumbered fleet is also considered a source of liquidity. As of Sept. 30 2013, the company reported a fleet market value of approximately BRL2.7 billion, which corresponded to a net debt coverage of 2.2x.
Competitive Advantages Support Strong Business Profile
Localiza has a very strong competitive position with a market presence that is nearly four times larger than its closest competitor. The company's leadership gives it a strong negotiating power with the automobile manufacturers and enable it to efficiently dilute fixed costs. Localiza's prominent used car sales distribution channel further supports its competitive advantages and enhances financial flexibility. The company has a low cost of financing and strong access to the local debt markets, which further improves its competitiveness.
Well-Positioned to Face Industry Risks
Competition is likely to increase, while inflation costs have already pressured Localiza's operating profitability. The company has the challenge to seek alternatives in order to partially offset some loss in operating margin as a result of its conservative strategy of maintaining market share by not passing along inflation to rental rates. Going forward, Localiza's solid business expertise and conservative approach to pricing strategy will be fundamental to avoiding deterioration in its profitability, as Fitch expects some deceleration in the used car market during 2014. Localiza's performance is partly connected to its pricing strategy for selling used vehicles.
Cash Flow Expansion and Financial Flexibility Persist
Localiza continued to improve its operating cash flow generation during 2013, although at lower growth rates. Lower GDP growth and stronger competition have somewhat limited further business expansion. As of (LTM) Sept. 30, 2013, net revenues grew 5% from 2012, reaching BRL3.4 billion, while operating fleet growth was 7%. In the same period, EBITDAR and funds from operations (FFO) increased to BRL1 billion and BRL724 billion, respectively, compared with BRL979 million and BRL687 million. During 2011, these figures were BRL903 million and BRL537 million, respectively. The greater labor costs and store rentals have been pressuring Localiza's operating margins, limiting scale gains. Over the LTM ended Sept. 30 2013, EBITDAR margin remained relatively stable at 30.6%, which is still quite consistent with its historical range between 29% and 31%. Nevertheless, going forward Fitch foresees some decline in operating margins, with the EBITDAR margins ranging from 26%-29%.
The car and fleet rental industry demands significant investments in fleet renewal to support the business growth. The company has successfully developed an asset sales strategy that allows it to sell around 70,000 used vehicles per year. This has enabled Localiza to sell vehicles consistently, including during the negative cycles of the industry and difficult economic environments, as evidenced during the first half of 2009. The proceeds from car sales have largely funded fleet renewal, given the significant discounts obtained from auto manufacturers for new vehicles. The potential market value of its relatively modern vehicle fleet is about 2.2x the value of its net debt. Localiza could monetize these assets in the event of a cash flow crisis, since they are not linked to guarantees. During LTM Sept. 30, 2013, capex for fleet renewal totaled BRL1.7 billion, and capex for growth reached BRL222 million. To offset these disbursements, proceeds from used car sales totaled BRL1.6 billion.
Strong Liquidity Profile
Localiza has consistently maintained a strong liquidity position. On Sept. 30, 2013, the company had total debt of BRL2 billion and cash and marketable securities of BRL791 million. On a pro forma basis considering the recent debentures issuance (BRL500 million), Localiza's cash balance supports debt schedule amortization up to 2016. The company's management has adopted a conservative and proactive financial strategy to limit the risks associated with its exposure to the cyclical and capital intensive nature of its business. Localiza's sizable pool of unencumbered fleet is also considered a source of liquidity. As of Sept. 30 2013, the company reported a fleet market value of approximately BRL2.7 billion.
Strong Credit Metrics
The company has a track record of strong credit protection measures for the industry. From 2009 through the LTM ended Sept 30, 2013, Localiza's FFO Adjusted Leverage averaged 2.8x, while the average for its total adjusted debt/EBITDAR ratio was 2.8x and its net adjusted debt/EBITDAR ratio was 2.1x. The company's debt consists primarily of debenture issuances (67%) banking credit lines (31%). Fitch expects Localiza to keep a net adjusted debt/EBITDAR ratio below 2.5x in the long term.
KEY RATING DRIVERS
The ratings could be downgraded due to a combination of higher leverage, lower liquidity, and/or a significant deterioration in the used car market in Brazil.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 5, 2013
- 'National Scale Ratings Criteria', dated Oct 30, 2013
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
National Scale Ratings Criteria