CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed at 'BB' the Long-term Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDR) of Corporacion Azucarera del Peru S.A. (Coazucar). Fitch has also affirmed Coazucar's senior unsecured notes at 'BB'. The Rating Outlook has been revised to Negative from Stable.
KEY RATING DRIVERS
The Negative Outlook is the result of a deterioration in Coazucar's EBITDA margin due to a structural change in the pricing premium enjoyed by Peruvian sugar companies in response to a surge in imported sugar. This change was responsible for about 50% of the decline in the company's EBITDA to USD99 million in 2013 from USD186 million in 2012. Price declines occurring at a faster pace than the drop in international prices for sugar will pressure the company's operating cash flow while the company is in the midst of around USD200 million of capex planned for the next two to three years, mainly for the Olmos Project. Beginning in November 2014, the company will also need to make annual payments of around USD9 million for water resources for the Olmos Project due to take-or-pay contracts, even though this project will not become operational until the middle of 2016.
The ratings reflect Coazucar's strong business position as the largest sugar producer in Peru. The company has a low cost structure and high operating margins due to the proximity of its operations to the sugar cane fields, its low dependence on third-party cane producers, and some of the world's highest sugar cane yields per hectare as a result of its favorable geographic location that allows for a continued growing period. Coazucar's ratings benefit from its shareholders, which have large and profitable investments in the dairy and cement industries within Peru. Fitch believes these shareholders could provide liquidity and support if needed. Balanced against these strengths is the volatility of earnings associated with the sugar industry, the company's exposure to currency exchange fluctuations, and event risk associated with the natural phenomenon, El Nino.
EBITDA and Margins Deterioration
Coazucar's EBITDA for the LTM ended March 31, 2014 was USD90 million. This compares unfavorably to the USD186 million in 2012. During these time periods, the company's EBITDA margin declined to 19% from 33%. About 50% of the downturn was due to the 3 cent and 4 cent decline in international prices for brown and white sugar, respectively, which is typical with a cyclical industry and was incorporated in the rating. The balance was primarily a result of a sharp decline in the spread for local prices versus international prices. Unfavorable weather conditions in Argentina and a strike in the company's lower margin business in Ecuador also contributed to a decline in EBITDA and margins. Fitch does not expect Coazucar to recover its historical EBITDA margins of around 40%. If sugar prices remain at depressed levels, the company's margins should improve slightly from the startup of its new refinery, which will result in an increase in the production of white refined sugar. During 2013, about 45% of the company's sugar sales were from white sugar. Lower margin brown sugar sales accounted for around 50% of sales. This ratio should reverse following the completion of the new refinery.
As of March 31, 2014, Coazucar had USD500 million of total adjusted debt and USD65 million of cash and marketable securities. This level of debt, in relation to USD90 million of EBITDA, resulted in a total leverage ratio of 5.6x for the LTM March 2014 and a net debt ratio of 4.8x. The net leverage ratio compares unfavorably against the 2.0x at the end of 2012. During 2013, the company spent USD73 million on capex, which contributed to negative free cash flow (FCF) of USD49 million. FCF is expected to be negative/neutral in 2014. Coazucar's leverage and FCF in the next few years would depend on recovery in prices and the amount of capex involved in the Olmos Project developments.
Coazucar's amortization schedule is weak, despite most of its debt being associated with its USD325 million note due in 2022. As of March 31, 2014, the company had USD65 million in cash which covered adjusted short-term debt of USD54 million by only 1.2x.
Strong Equity Holder
Fitch views as positive the fact that the company is part of a conglomerate of companies owned by the Rodriguez Banda Family (50/50% by the two brothers) which has a tangible presence and long tradition of operations in Peru and the region. The conglomerate has leading business positions in every sector in which it participates. Fitch factors into its rating the potential support from the shareholder to Coazucar and believes that cash will be injected into the company if its liquidity deteriorates further.
A negative rating action could occur in case of further deterioration in the group's liquidity position due to increased capital investment or lower margin without any tangible support from its shareholder. A downgrade could occur if Coazucar's net leverage exceeds 3.5x consistently during mid-cycle sugar prices.
An Outlook revision to Stable could occur if Coazucar improves its pricing power, reduces leverage and improves cash flow through the investment cycle. Tangible support from the shareholder that improves liquidity and lowers leverage could also lead to positive rating actions.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage