Fitch Affirms Cimento Tupi S.A.'s IDRs at 'B'

CHICAGO--()--Fitch Ratings has affirmed the following ratings of Cimento Tupi S.A. (Tupi):

--Foreign currency Issuer Default Rating (IDR) at 'B';

--Local currency IDR at 'B',

--Senior Unsecured Notes Due 2018 at 'B/RR4';

--Long-Term National Rating at 'BBB-(bra)'.

The Rating Outlook has been revised to Negative from Stable.

The Negative Outlook reflects the challenges the company faces following the expansion of the Pedro do Sino cement plant. The construction of this plant, which was completed during May 2013, went approximately BRL100 million over budget. Ramp-up of the mill was hindered by equipment malfunctions during the third quarter. As a result, the company's net leverage for 2013 will be higher than originally projected by Fitch. Tupi's net leverage as of Sept. 30, 2013 was 4.6x. The expansion project increased the company's capacity to 3.2 million tons from 2.4 million tons. Challenges faced by the company in 2014 include increasing capacity utilization rates, which were around 56% in 2013.

Tupi has made a number of changes to its management team to face an environment in which cement demand remains weak relative to expectations. The performance of the new sales and financing team will be tested during 2014, as the growth in cement demand is not anticipated to be robust. During 2013, Brazilian cement demand grew by around 2%. At the end of 2014, the company faces a net leverage covenant of 4.25x. Fitch's base case shows Tupi's debt at approximately BRL581 million in 2014 from approximately BRL658 million in 2013. Fitch believes the lenders would likely waive or amend the covenants.

Tupi's 'B' ratings reflect its small business position, high leverage and the volatility of its cash flow generation due to the cyclicality of the cement industry. Fitch believes the company will be able to slowly deleverage, as operating cash flow should be begin to improve as volumes and sales prices increase. If the company achieves volumes of around 2.2 million tons, free cash would likely turn positive, as capital expenditures are projected to be low and dividends are not expected to be paid.

KEY RATING DRIVERS

High Leverage and FX Risks

Tupi has maintained high leverage since it started construction on the expansion of the Pedra do Sino plant in 2011. Tupi was forecasted to invest BRL250 million on its expansion plan; however, overages ballooned the amount to BRL350 million. Tupi completed its capex project in early 2013. As cash flow is freed up from capex projects, Tupi is focused on delevering to below 4.25x by the end of 2014. Fitch believes it will be a challenge for Tupi to meet this leverage restriction by year end. Furthermore, Tupi is exposed to currency mismatch (FX) risks. About 60% of its debt is denominated in USD, and 100% of its cash flow generation is in local currency.

Weak Business Profile

Tupi's small production scale and its lack of geographic diversification heighten the risk of its exposure to the volatility of the cement industry. In 2013, Tupi had a 2.7% market share in the domestic market and 5.8% of market share in the Southwestern region. As a result of its small size, Tupi has a higher cost structure than the larger integrated Brazilian cement producers. The strong credit profile of these conglomerates may allow them to pressure prices during a downturn in the industry in an attempt to sustain volumes, which would negatively affect Tupi's cash flow and ability to service its debt.

Tight Liquidity and Refinancing Risks

Tupi's liquidity is weak. As of Sept. 30, 2013, Tupi had BRL89 million in cash and marketable securities and BRL89 million of short-term debt. Approximately BRL73 million of the company's short-term debt is with local banks and is denominated in Brazilian reais. Most of this debt was raised during 2013 and Fitch expects it to be rolled over. The levels of short-term debt coverage as measured by cash plus free cash flow (FCF) / short-term debt was negative at (0.9x) and (1.3x), respectively for LTM Sept. 30, 2013 and the fiscal year ended 2012. Liquidity is projected to remain tight over the next several years as Tupi uses cash flow to repay debt.

Long-term Sector Prospects Favorable, Which Should Sustain Cement Prices

Cement consumption is projected to grow by around 3% during 2014. The outlook is more favorable in the medium- and longer-term. The expansion of the real estate segment and infrastructure works should also favor Tupi's operations. Nevertheless, profitability margins should remain relatively flat, as a lot of new capacity is being added by the leading cement producers. Tupi's end-market, which is highly oriented toward the refurbishment and construction of homes, should not be affected materially by the high level of infrastructure projects in Brazil, as it is linked more with unemployment and income levels.

RATING SENSITIVITIES

A rating downgrade could result from the company's inability to reduce its high leverage position, resulting in a covenant default or the need to refinance. A significant deterioration in the company's cash flow generation and operating margins due to a downward turn in the Brazilian market and/or liquidity issues would also pressure the ratings.

Key considerations for a positive rating action or Outlook would be a faster deleveraging process, coupled with stronger than expected volume growth and solid operations throughout the year.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'National Ratings - Methodology Update' (Oct. 30, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

National Scale Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824660

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Contacts

Fitch Ratings
Primary Analyst
Phillip Wrenn, +1-312-368-2075
Associate Director
Fitch Ratings, Inc.
70 W Madison St
Chicago, IL 60602
or
Secondary Analyst
Debora Jalles, +55-21-4503-2600
Director
or
Committee Chairperson
Joe Bormann, CFA, +1-312-368-3349
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Phillip Wrenn, +1-312-368-2075
Associate Director
Fitch Ratings, Inc.
70 W Madison St
Chicago, IL 60602
or
Secondary Analyst
Debora Jalles, +55-21-4503-2600
Director
or
Committee Chairperson
Joe Bormann, CFA, +1-312-368-3349
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com