Fitch Places GVO's Ratings on Watch Negative

SAO PAULO--()--Fitch Ratings has placed Virgolino de Oliveira S.A. Acucar e Alcool's (GVO) and Virgolino de Oliveira Finance S/A's ratings on Rating Watch Negative. A complete list of rating actions follows at the end of this release.

The rating action reflects a more challenging environment to refinance its relevant short-term debt. The still stressed sugar and ethanol sector and the recent financial problems of another company in this sector (Aralco) may make it difficult for GVO to roll over its debt. The sector remains pressured by still depressed sugar prices, uncertainties regarding the future behaviour of ethanol prices, and unusual dry weather conditions in Sao Paulo State in early 2014, which could affect agricultural yields in the 2014/2015 season.

Positively, GVO has concluded its expansion program and free cash flow (FCF) generation is expected to be positive in 2014. This, together with potential higher sugar prices, may benefit GVO's leverage ratios in the future. Fitch believes that the bulk of the recent price decline has been left behind, with main industry fundamentals pointing to a gradual price recovery. There is no new capacity being added worldwide and demand continues to grow steadily, driving the global supply-demand equation to a higher deficit. The company's strategic shareholding position in Copersucar also benefits GVO as it implies a long-term commercial partnership with this cooperative.

Challenging Refinancing Prospects

GVO's liquidity is under pressure, as the company has BRL834 million in short-term debt and cash reserves of BRL129 million as of Jan. 31, 2014. This has led to cash-to-short term debt coverage of 15%, which would be 35% if Copersucar debt is excluded from the calculations. The company is taking a series of initiatives to address its liquidity issue, which include refinancing of a portion of its short-term debt with local banks and negotiations with foreign funds over the possibility of doing bilateral loan transactions. One of these funds has already agreed to lend the company a three-year USD60 million loan with a six-month grace period. The loan will be secured by a pledge of sugar cane. The company's prospects largely depend on the final outcome of these negotiations.

The credit line made available by Copersucar partially mitigates the company's weak liquidity as GVO can tap the financing as long as it is able to crush sugar cane and deliver sugar and ethanol to the cooperative. This working capital financing line is equivalent to 80% of GVO's inventories and limited to a maximum of 40% of the company's revenues. This credit line, which is equivalent to over BRL500 million, enhances financial flexibility and is secured by inventories and/or linked to bank guarantees. This facility is an important liquidity source for GVO, especially in periods of more restrictive access to credit. The beginning of the crushing period in April 2014 may also enhance the company's cash inflows in the next months.

High Leverage:

GVO presents a weak financial profile underpinned by its aggressive capital structure in a volatile sector. In the LTM ended Jan. 31, 2014, the company's consolidated net debt/EBITDA ratio, considering Copersucar dividends, was 6.4x. Excluding advances from Copersucar backed by sugar and ethanol inventories (BRL534 million), GVO's net debt/EBITDA would be 5.1x for the same period. This high leverage results from the combination of pressured free cash flow (FCF) due to larger capital expenditures during the last harvests, which included crop expansion to increase the contribution of owned sugar cane supply, and the negative impact of the FX variation on GVO's debt.

The recent investments in agricultural activities benefited GVO's operational cash flow and the scale gains explain part of the upward trend in FCF in the FY2013 and on Jan. 31, 2014. During the same LTM, the company's cash flow from operations of BRL436 million was able to meet capital expenditures of BRL365 million, resulting in a positive FCF of BRL71 million.

Rating Sensitivities

A negative rating action could occur if the company does not roll over a substantial portion of its short-term debt and if its liquidity deteriorates further.

Liquidity improvement coupled with lower leverage ratios could support an upgrade.

Fitch has placed the following ratings of GVO and Virgolino Finance on Negative Watch:

Virgolino de Oliveira S.A. Acucar e Alcool

-- Foreign and Local Currency Issuer Default Rating (IDR) 'B';

-- Long term National Scale Rating 'BBB(bra)';

-- BRL100 million Senior Unsecured debentures due 2014 'BBB(bra)'.

Virgolino de Oliveira Finance S/A

-- USD300 million Senior Unsecured Notes due 2022 'B/RR4';

-- Foreign and Local Currency Issuer Default Rating (IDR) 'B'.

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

Applicable Criteria and Related Research:

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

-- 'National Scale Ratings Criteria' (Oct. 31, 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=824670

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings Brasil Ltda
Primary Analyst
Claudio Miori, +55-11-4504-2207
Associate Director
Alameda Santos, 700 - 7 andar, Sao Paulo, sp CEP 01418-100
or
Secondary Analyst
Alexandre Garcia, +55-11-4504-2616
Associate Director
or
Committee Chairperson
Mauro Storino, +55-21-4503-2625
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings Brasil Ltda
Primary Analyst
Claudio Miori, +55-11-4504-2207
Associate Director
Alameda Santos, 700 - 7 andar, Sao Paulo, sp CEP 01418-100
or
Secondary Analyst
Alexandre Garcia, +55-11-4504-2616
Associate Director
or
Committee Chairperson
Mauro Storino, +55-21-4503-2625
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com