RIO DE JANEIRO & CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Cosan S.A. Industria e Comercio's (Cosan) foreign and local currency Issuer Default Rating (IDR) at 'BB+' as well as its National long-term rating at 'AA(bra)'. A full list of rating actions follows at the end of this release.
The corporate Rating Outlook is Stable.
Cosan's ratings reflect its sound business platform and the continuing contribution from a diversified asset portfolio and predictable cash flow businesses on a consolidated basis, which softens the inherent volatilities of the sugar and ethanol industry. Such cash flow predictability partially mitigates the relatively moderate leverage on a consolidated basis of net adjusted debt to EBITDAR at 3.5x.
Cosan's high leverage at the holding level (BRL5.5 billion) remains as a concern, even though liquidity and refinancing risks should show some improvements following the announcement of a corporate reorganization on June 27, 2014. The impact on Cosan's rating following the acquisition of America Latina Logistica (ALL) will largely depend on the growth strategy to be pursued under the new logistic segment and on the final configuration of the group. Fitch will monitor the developments of this transaction and take the appropriate rating action once the process is deemed concluded.
KEY RATING DRIVERS
Lower Exposure to Sugar and Ethanol and Robust Cash Flows
Cosan's ratings are strongly supported by the increasing contribution of a more diversified asset portfolio and more predictable cash flow. Currently, under the new accounting practices the majority of Cosan's consolidated EBITDA comes from relatively steady operations such as distribution of natural gas, lubricants and logistics. The sugar and ethanol business as well as downstream activities are accounted for through the equity method and therefore they affect Cosan's performance through the dividends flow. Given this accounting change and the change of fiscal year-end to December 31 from March 31, Cosan's historical consolidated performance is not comparable.
During the last 12 months (LTM) ended March, 31 2014, the majority of Cosan's businesses have reported increasing operating performance with Raizen Energia being the only exception. Raizen Combustiveis and Comgas have reported increased revenues and volumes as well as higher EBITDA margins, which have had a positive effect on operating cash flow generation. Rumo Logistica has been reporting revenue growth and stable EBITDA margins. The performance of Raizen Energia reflects the pricing challenges faced in the sugar and ethanol industry, and has resulted in a 20% drop in the company's cash flow from operations (CFFO).
For the LTM through March 31 2014, Cosan's cash flow performance was robust with funds from operations (FFO) of BRL2.5 billion and cash flow from operations (CFFO) at BRL2.0 billion. Cash flow was sufficient to result in positive free cash flow of BRL520 million after capex and dividends totaling BRL1.5 billion.
Leverage is a Concern
Leverage is moderate on a consolidated basis and high on a standalone basis. Consolidated figures reported net adjusted debt to EBITDAR at 3.5x for the LTM ended March 31. 2014. At the holding company level, net adjusted debt to EBITDA plus dividends was 10.0x as of March 31, 2014. Fitch incorporates the dividends received from Raizen into the calculations as well as tax financing and inter-company loans. As of March 31, 2014, Cosan S.A. at the holding company level had total debt of BRL5.5 billion, including mostly BRL2.8 billion of bond issuances, BRL1.4 billion of debentures and tax financing of BRL760 million. On a consolidated basis, total debt was BRL10.1 billion as of March, 31 2014.
Corporate Reorganization is Moderately Positive
On June 27, 2014, Cosan announced a corporate restructuring that should lengthen the company's debt maturity profile and reduce financial costs at the holding company level. Per the announcement, Cosan will transfer all common shares issued by Raizen Energia and Raizen Combustiveis plus net debt of BRL1.8 billion to its wholly-owned subsidiary Cosan Investimentos and Participacoes. At the same time, two investment funds sponsored by two large Brazilian Banks will subscribe BRL2 billion of non-voting preferred shares issued by Cosan Investimentos, which will use the proceeds to pay off the outstanding debt, comprising mostly debentures and working capital loans.
Cosan's leverage should not change, as the preferred shares should be treated as a liability on the balance sheets of Cosan Investimentos and Participacoes given certain put/call provisions on the preferred shares. Nevertheless, the transaction will allow Cosan to lengthen its debt profile. There will also be gains in terms of financial costs as the preferred shares will be remunerated at a lower interest rate compared to the existing debt.
Liquidity at Holding Level is Weak
As of March 31, 2014, at the holding company level, Cosan had only BRL17 million of cash versus short-term debt of BRL640 million. This is partially mitigated by a committed Stand-by Facility of BRL750 million provided by three Brazilian Banks. With the corporate reorganization, Cosan should show manageable debt service coverage at the holding level, with debt amortizations mostly falling due five years from now. The company is expected to receive over BRL1.5 billion of dividends from Raizen during the next three years (over BRL500 million per year).
Cosan reports comfortable liquidity ratios on a consolidated basis. As of March 31, 2014, its BRL 1.5 billion cash exceeded short-term debt by 44%. The debt is well-laddered and no relevant concentration is anticipated in the short- and medium-terms.
Ongoing Acquisition of ALL; Higher Expected Capex May Pressure Credit
Cosan is proceeding with the acquisition of America Latina Logistica S.A.S., which is still pending approval by regulators. Assuming the full consolidation of ALL into Cosan (Cosan will have the majority of the Board's seats), Cosan's consolidated net debt-to-adjusted EBITDA would increase to an average of 3.2x from the 2.4x that would be achieved without the acquisition. A high expected capex plan to be implemented by ALL may lead Cosan to consistently report negative free cash flow in the next three years and thus avoid a deleveraging process. This impact can, however, be avoided at the consolidated level depending on the final configuration of the group.
Fitch will be monitoring the conclusion of the ALL acquisition and a negative rating action could arise depending on the final configuration of the group and under a potential sizeable capex program at ALL. A downgrade could be triggered if Cosan fails to deleverage to below 3.0x in the medium term.
An upgrade is unlikely in the short- to medium-term as Cosan's growth strategy should continue to avoid a relevant deleveraging process, primarily at the holding level.
Fitch affirms the following ratings:
--Foreign and local currency IDRs at 'BB+';
--National scale rating at 'AA(bra)'.
Cosan Overseas LTD:
--Perpetual notes at 'BB+'.
Cosan Luxembourg S.A:
--Senior Unsecured Notes due in 2018 and 2023 at 'BB+'.
In addition, Fitch has withdrawn the following rating:
Cosan Overseas LTD:
--Foreign currency IDR at 'BB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'National Scale Ratings Criteria' (Oct. 31, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
National Scale Ratings Criteria