Fitch Rates Votorantim's Guaranteed Senior Notes 'BBB'

CHICAGO & RIO DE JANEIRO--()--Fitch Ratings has assigned a rating of 'BBB(EXP)' to the proposed notes to be issued by Companhia Brasileira de Aluminio (CBA), a wholly-owned subsidiary under Votorantim Participacoes (VPAR). The senior unsecured notes of up to USD400 million will be due in 2024 and are unconditionally guaranteed by Votorantim Industrial (VID), VPAR's industrial sub-holding company.

Proceeds from the notes issuance will be used to finance a tender offer for the following outstanding notes: VID's 6.625% notes due 2019, Voto-Votorantim Overseas Trading Operations IV Limited 7.75% notes due 2020, and CBA's 6.75% notes due 2021. The purpose of the 2024 notes is to reduce cross guarantees between VID's industrial subsidiaries. The rating of the notes reflects the VID guarantee and the strength of its operating subsidiaries, particularly Votorantim Cimentos (VCSA).

KEY RATING DRIVERS:

Excellent Cement Business

VCSA (rated BBB) is the world's fifth largest cement company with 54 million tons of installed capacity. It has a 36% market share in Brazil and is the key operating subsidiary of VID. During 2013, VCSA accounted for 67% of VID's BRL5.4 billion of EBITDA and 69% of VID's BRL16.7 billion of net debt. VCSA is poised to improve its operating cash flows due to investments that have increased its cement capacity in Brazil from 23 million tons per year (mtpy) to 32 mtpy since 2011. Fitch projects VCSA's standalone net debt-to-EBITDA ratio will decline to 2.8x in 2014 from 3.3x in 2013. During May 2014, the company received an unfavorable ruling from Brazil's anti-trust agency, CADE, that resulted in a BRL1.5 billion fine and the forced sale of certain assets. VCSA has announced its intent to appeal the ruling. The company will most likely be forced to post guarantees during the appeal process, which is expected to extend beyond 2014. In the event that VCSA has to pay the fine during 2014, Fitch projects pro forma net leverage would be approximately 3.2x

Strong Market Pulp Position

Through VID, VPAR owns 29% of Fibria (rated 'BBB-'), which is the world's largest producer of market pulp with 5.3 million tons of bleached eucalyptus kraft market pulp capacity. Fibria is among the lowest cost producers of pulp globally. Fibria's leading position is viewed as sustainable due to its ownership of 970,000 hectares of land in Brazil upon which it has developed 561,000 hectares of eucalyptus plantations. The land had an accounting value of USD530 million, and forestry plantations on this land had an accounting value of USD1.450 billion. Fitch projects that Fibria will generate about USD1.3 billion of EBITDA in 2014 and that its net leverage will decline to around 2.0x from 2.4x in 2013.

Strong Growth Prospects in Mining

VID owns 50.6% of Milpo (rated 'BBB'), which is a low-cost polymetals miner based in Peru with zinc accounting for 41% of its 2013 revenues, followed by copper (33%), silver (19%), lead (6%) and gold (1%). Cash flow generation at Milpo has historically been robust due to its competitive position on the cost curve. Milpo's consolidated cash cost of production improved to USD35 per metric ton (mt) of treated ore in 2013 from USD36 per mt in 2012, following an operational efficiency optimization program that included a streamlining of expenses. Fitch links Milpo's credit strength to that of its parent as it is listed as a 'Material Subsidiary' for the cross-default and acceleration provisions on Votorantim debt. Milpo's net leverage ratio was 0.2x in 2014.

Intercompany Debt Guarantees

VPAR continues to take measures to reduce the cross-guarantee structures that exist within its operating companies. During March 2014, the company repurchased approximately USD900 million of notes due in 2019 and 2021 that were issued by CBA and were guaranteed by VPAR (100%) and VCSA (50%). During April, the company took additional steps to decrease cross guarantees when VCSA issued non-guaranteed notes and used the proceeds to repurchase its 2017 notes that were guaranteed by CBA, VPAR and VID. The expected tender offer in June 2014 will further reduce the cross-guarantees between some of VID's subsidiaries.

Strong Liquidity

VID had BRL5 billion (USD2.1 billion) of cash and marketable securities as of Dec. 31, 2013 and BRL22 billion (USD9.8 billion) of total debt. The company also has a BRL3.4 billion (USD1.6 billion) revolving credit facility that has not been drawn. VID faces amortizations of BRL2 billion (USD925 million) in 2014 and has strong market access in both Brazil and abroad.

Negative Outlook

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. Fitch believes it will be a challenge for the companies to reach this targeted net leverage level by the end of 2014 without extraordinary measures.

RATING SENSITIVITIES:

VID's rating could be negatively affected by a significant deterioration in demand for cement in Brazil or a broader global downturn. A change in management's philosophy regarding lowering leverage could also lead to a ratings downgrade. If VID's net leverage is not below 2.5x by the end of 2015, the ratings of VID and its industrial subsidiaries will likely be downgraded.

Factors leading to the consideration of a Stable Outlook are lower absolute and relative debt levels for a prolonged period of time. A ratings upgrade of the Brazilian sovereign would also be positive for the company's credit profile in the long term due to the company's exposure to the domestic market.

Fitch currently rates Votorantim Participacoes and its wholly-owned debt issuing subsidiaries as follows:

Votorantim Participacoes S.A. (Votorantim)

--Foreign and local currency Issuer Default Ratings (IDRs) 'BBB';

--National scale rating 'AAA(bra)'.

Votorantim Industrial S.A. (VID)

--Foreign currency IDR 'BBB'.

Votorantim Cimentos S.A. (VCSA)

--Foreign currency IDR 'BBB';

--2041, 2021 and 2017 guaranteed notes 'BBB'.

Companhia Brasileira de Aluminio (CBA)

--Foreign currency IDR 'BBB';

--2019 and 2021 guaranteed notes 'BBB';

--Expected Senior unsecured guaranteed notes 'BBB'.

Voto-Votorantim Overseas Trading Operations IV Limited

--Foreign currency IDR 'BBB';

--2020 notes 'BBB'.

The Rating Outlook is Negative.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'National Ratings Criteria' (Oct. 30, 2013);

--'Evaluating Corporate Governance' (Dec. 12, 2012).

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=749393

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834115

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Contacts

Fitch Ratings
Primary Analyst
Phillip Wrenn
Associate Director
+1-312-368-2075
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Committee Chairperson
Dan Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Phillip Wrenn
Associate Director
+1-312-368-2075
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Committee Chairperson
Dan Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com