SAO PAULO, Brazil--(BUSINESS WIRE)--Fitch Ratings has affirmed the Foreign and Local Currency Issuer Default Ratings (IDRs) of America Latina Logistica S.A. (ALL) at 'BB-' and the company's National Scale Long-term Ratings at 'A(bra)'. Fitch has also affirmed the ratings of ALL's subsidiaries and their respective unsecured debentures at 'A(bra)'. The Rating Outlook remains Positive.
A full list of the rating actions is shown below.
ALL's ratings continue to reflect the company's consistent cash flow generation through the economic cycle as well as its solid business position in the Brazilian railroad industry. The company's adequate financial flexibility and its evenly scheduled debt amortization program are also positive rating considerations.
The Positive Outlook considers the potential for ALL's business to deleverage over the next two years as volumes increase from the start-up of operations in the rail line segment from Alto Araguaia to Rondonopolis and the completion of the duplication at an important stretch of its Sao Paulo's rail network. These initiatives are expected to result in a consistent increase in volumes transported by around 12% to 15% beginning in 2015.
In addition to the aforementioned, Fitch views the merger of ALL with Rumo Logistica as positive for ALL's credit profile as it brings a strong shareholder to its capital structure. The merger will also allow the company to benefit from synergies between the two companies' logistics business model. On a pro forma basis, the merger would allow a faster than expected deleveraging trend for ALL, as Rumo is a very low leveraged company; however a positive rating action will largely depend on the growth strategy to be pursued by Cosan, the new shareholder, for the new logistic segment. Fitch will monitor the developments of this transaction and take the appropriate rating action once the process is deemed concluded.
KEY RATING DRIVERS:
Solid Business Position:
The ratings incorporate the company's solid business position as the sole railroad transportation operator in the South and Mid-Western regions of Brazil, areas with high growth potential due to stable global demand for grain. Although the company faced some operating challenges during 2013 and 1Q2014, the long-term fundaments of ALL's businesses remains strong. The company's operating model has demonstrated resilience to adverse global economic conditions through several cycles. The company has shown to be able to increase volumes transported in the last years, during diverse economic scenarios.
Credit Linkage Incorporated:
The ratings of ALL's subsidiaries are at the same rating level as the parent company, ALL, due to the strong operational, financial and legal ties between the companies. This relationship relies on the majority ownership ALL maintains on its subsidiaries; the fact that the parent controls the management and the flow of dividends from the operational companies; the strong financial integration between the companies' operations; the cross guarantees between ALL and its railroad subsidiaries' debt; and the strategic importance of the railroad subsidiaries to ALL. Structural subordination risks due to ALL's status as a holding company are mitigated by the unrestricted cash distribution policy of its operating subsidiaries, and the guarantees that these Brazilian operational subsidiaries provides to the vast majority of ALL's debt.
High and Stable Margins, Future FCF Trend Positive:
ALL's cash flow from operations (CFFO) has remained consistent and have been boosted by its ability to capture additional volumes of cargo. The company has consistently maintained CFFO of more than BRL500 million since 2011, representing an average of 17% of net revenues The company's EBITDA margins remain stable in the 49% to 52% range during the same period. The ratings incorporate the expectation that the company's margin will remain stable and its CFFO will improve during 2014-2015 period.
FCF remains negative due to the high capex and despite the positive trend in the company's CFFO as a result of large investments over the past five years. During the LTM ended June 30, 2014, the company's FCF was negative BRL295 million due to BRL1 billion of capital expenses. Capex is expected to remain high, at about BRL900 million per year over the next five years. ALL will be challenged to consistently increase its operational cash flow in order to boost FCF generation. FCF is expected to remain negative during 2014 but become slightly positive in 2015 onwards while investments mature. FCF should gradually improve, due to an increase in the company's transportation capacity following the completion of some large projects in 2015.
High Leverage:
ALL's leverage remains high. For the LTM, ALL's consolidated adjusted net leverage, measured as net adjusted debt/EBITDAR ratio, was 4.4x. The company's total adjusted debt was approximately BRL11.8 billion at the end of June. This debt includes BRL11 billion in on-balance-sheet debt, which consist primarily of concession obligations, loans from Banco Nacional de Desenvolvimento Economico e Social (BNDES) and debentures - and BRL838 million in estimated off-balance-sheet obligations related to rental expenses. Total off-balance-sheet debt is calculated adjusting by 5x the company's rental payments of BRL67.6 million during LTM June 30, 2014.
ALL's net adjusted financial leverage has the potential to decline depending on the balance between the company's cash flow generation, which is expected to increase during the next two years, and the actual level of capex. Net adjusted leverage is likely to trend toward 4.2x by the end of 2014 and be less than 4.0x by the end of 2015. Net leverage may fall below 4.0x by 2014 if the merger with Rumo is concluded. This could trigger a ratings upgrade.
Adequate Liquidity & Well-Scheduled Debt Payments:
ALL continues to maintain a solid liquidity position, supported by approximately BRL2.3 billion of cash and marketable securities as of June 30, 2014. ALL has BRL2 billion of debt due during the next 12 months. The company's exposure to refinancing risk is manageable, as reflected by its adequate ratios of cash to short term debt of 1.2x and cash plus CFFO to short-term debt of 1.6x.
The company has a manageable debt amortization schedule, with no concentration of payments. ALL's indebtedness is principally comprised of BRL3.1 billion of loans with the development bank, Banco Nacional de Desenvolvimento Economico e Social (BNDES), BRL3 billion of debentures and BRL1.7 billion of lease and concession obligation.
RATING SENSITIVITY:
The ratings may be upgraded as a result of an improvement in the company's credit profile with a focus on an ongoing reduction in leverage, along with consistently high levels of liquidity. Improvement in the company's FCF generation and deleveraging, with the adjusted leverage trending below 4x times in a sustainable basis would likely result in upgrade of the ratings. The conclusion of the deal with Rumo is also a trigger for an upgrade if it would led to a faster than expected deleveraging trend for the company.
A negative rating could be triggered by a long term deterioration in the company's operational performance, or if leverage increases materially to a level above 4.5x. Fitch will be monitoring the conclusion of the merger with Rumo and a negative rating action could arise depending on the potential sizeable capex program at the merger entity. Negative ratings actions could also result from acquisitions and/or investments that are not considered core to operations by Fitch, or if the company distributes an unexpected amount of dividends.
Fitch has affirmed the following ratings:
ALL:
--Long-term Foreign and Local Currency IDRs at 'BB-';
--Long-term National Rating at 'A(bra)';
--Long-term National Rating of the 8th Debenture Issue at 'A(bra)';
--Long-term National Rating of the 9th Debenture Issue at 'A(bra)';
--Long-term National Rating of the 10th Debenture Issue at 'A(bra)'.
ALL Malha Sul S.A.:
--Long-term National Scale Rating at 'A(bra)';
--Long-term National Rating of the 3rd Debenture Issue at 'A(bra)'.
ALL Malha Norte S.A.:
--Long-term National Scale Rating at 'A(bra)';
--Long-term National Rating of the 6th Debenture Issue at 'A(bra)';
--Long-term National Rating of the 8th Debenture Issue at 'A(bra)'.
ALL Malha Paulista S.A.:
--Long-term National Scale Rating at 'A(bra)';
--Long-term National Rating of the 1st Debenture Issue at 'A(bra)'.
The Outlook for the corporate ratings is Positive.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=873714
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