CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Votorantim Cimentos S.A.'s (VCSA) ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--USD1.25 million senior unsecured notes due 2041 at 'BBB';
--Euro750 million senior unsecured notes due 2017 at 'BBB'.
In addition, Fitch has assigned an expected rating to Euro and USD note issuances for up to USD1 billion due in 2021 at 'BBB'.
The Rating Outlook is Negative.
KEY RATING DRIVERS:
Backbone of Votorantim Group
Votorantim Cimentos is the key operating subsidiary of Votorantim Industrial S.A. (VID), and has been and continues to be the backbone of the parent company's rating. During 2013, Votorantim Cimentos accounted for 67% of VID's EBITDA and 69% of its net debt. VID had BRL23.4 billion of total debt and BRL6.7 billion of cash and marketable securities as of Dec. 31, 2013. During 2013, VID generated BRL5.4 billion of consolidated EBITDA, which represents an improvement from BRL4.5 billion during 2012. VID's funds from operations (FFO) adjusted net leverage ratio was 5.0x during 2013 and its net debt/EBITDA ratio was 3.1x. These represented improvements from 6.8x and 4.0x, respectively, in 2012.
Intercompany Debt Guarantees Still Exist within Votorantim Group
Despite the desire of the Votorantim group (VPAR) to cut the legal ties between its subsidiaries, several cross-guarantee structures will continue to exist beyond 2014. The first step taken by VPAR to separate the ties began March 2014, when it repurchased approximately USD900 million of notes due in 2019 and 2021 that were issued by sister company Companhia Brasileira de Aluminio (CBA) and were guaranteed by VPAR (100%) and Votorantim Cimentos (50%). Following the completion of this tender offer, approximately USD576 million of these notes remained outstanding, of which VCSA is responsible for approximately USD288 million. VCSA's currently contemplated note issuance is the second step in the process. Proceeds from the proposed 2021 note issuances will be used to repurchase its Euro750 million notes due in 2017, leaving VCSA with USD1.250 billion of international notes due in 2041 that have a guarantee from VID (100%). VCSA also provides a guarantee to 50% of the Voto-Votorantim Overseas Trading Operations IV Limited notes due in 2020, of which USD175 million remains outstanding; the other guarantors of the 2020 notes are VPAR (100%) and Fibria (50%). Votorantim Cimentos also has debentures and bank loans that have guarantees from VID and/or VPAR that it currently is working to restructure without guarantees.
Negative Outlook due to High Leverage
The ratings of VPAR, VID, and VCSA were assigned a Negative Rating Outlook during August 2013 because two deleveraging events did not occur as expected in 2013. The postponement of these initiatives has delayed VID's and VCSA's ability to reach its targeted net debt level of around 2.0x; this is also VCSA's targeted debt level. The first expected deleveraging event was the IPO of about 20% of Votorantim Cimentos for around BRL6 billion. The company had started the road show for the IPO in June 2013 when the equity markets experienced declines; since that time equity values continue to lag the broader market. The IPO is still expected to occur but not likely until 2015, as weak economic conditions in Brazil and the presidential election during November are not likely to create strong equity market conditions during 2014. The second expected deleveraging event in 2013 was VPAR's bank interest sale, which will likely not occur in the foreseeable future.
Strong Cement Business Position
VCSA is the world's fifth largest cement company excluding its China operations with 54 million tons of installed capacity. On a standalone basis the company's credit profile is consistent with a weak 'BBB' rating. An IPO or the continued organic deleveraging would solidify its rating, as well as that of the group, at 'BBB'. VCSA's strength is derived from its 36% market share within Brazil, the world's fourth largest cement market with 32 million tons of annual capacity. Cement consumption in Brazil has grown at an average rate of 8% per year since 2004. In the U.S., the company has 5 million tons of capacity in Florida and the Great Lakes region. The U.S. market is projected to grow by 8.5% in 2014 and 9% in 2015 according to USGS, PCA and CX estimates. In recent years, the U.S. market has been more volatile than the Brazilian market. In EMEA, the company has 16 million tons of capacity in Spain, Morocco, Turkey, Tunisia, India, and China. The company intends to sell its Chinese cement assets, which have neither a strong national or regional presence.
Gradual Decrease in Leverage without IPO
VCSA's recorded net leverage was 3.3x as of Dec. 31, 2013. The company is focused on continued deleveraging through increased volumes and lower capital expenditures over the next several years. Fitch projects VCSA will report net leverage of 2.8x at 2014 and further decline to 2.0x by 2018. The company's targeted net leverage is 2.0x. The company attempted to accelerate its deleveraging through an IPO in 2013 that was postponed during to unfavorable market conditions and intends to issue an IPO once the market improves.
Solid Operating Cash Flow but High Growth Capex
VCSA's adjusted cash from operations (CFO) was BRL2.1 billion for 2013, up from BRL1.9 billion for 2012. However, growth capex has been high, leading to negative free cash flow (FCF). During 2013, capex was BRL1.3 billion, while in 2012 it was BRL1.5 billion. Since the beginning of 2011, VCSA has increased its production capacity by 8 million tons in Brazil. During 2013, dividends to the parent company were at more normal levels of BRL987 million and compare favorably to a high level of dividends of BRL2.3 billion in 2012; most of the 2012 dividend was done in anticipation of the IPO. In 2013, FCF improved from negative BRL1.8 billion during 2012 to negative BRL186 million for 2013 due to the increase in CFO and decline in dividends.
VCSA's liquidity is very strong. The company's cash position was BRL1.9 billion as of the fiscal year ended Dec. 31, 2013. While strong, this is weaker than VCSA's cash position of BRL3 billion for fiscal 2012. VCSA's amortization schedule is manageable, with an average debt maturity of 9.3 years. Current cash on hand can cover three years of debt amortization. VCSA has strong capital market access in both Brazil and abroad.
VCSA's margins are among the highest within its industry globally and higher than any of its large peers. Keys to the company's strong margins include the favorable sales mix, fully integrated operations, and its large presence in every region of Brazil. VCSA's EBITDA as of Dec. 31, 2013 was BRL3.5 billion, which resulted in margins of 29%. EBITDA margins have ranged between 29%-33% over the last four years. Fitch projects EBITDA margins to be around 30% during 2014.
VCSA's rating could be negatively affected by a significant deterioration in the global macroeconomic and business environment resulting in declining profitability and weaker credit metrics or significantly higher levels of capital expenditures leading to negative FCF. Fitch would downgrade VCSA if net leverage is not below 2.5x by the end of 2015. Also, an increase in the leverage of the other industrial companies that comprise VID could also lead to a ratings downgrade, assuming VCSA's guarantees of related entities' debt are still in place. A negative ruling by Brazil's anti-trust agency that would have an immediate cash flow or capital structure impact upon the company could also lead to a downgrade.
Votorantim Cimento's rating or Outlook could be positively affected by stronger than expected improvement in its cash flow generation, leverage, liquidity, and profitability metrics. An IPO would likely lead to a Stable Outlook. Increased geographic diversification would also be viewed positively.
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