CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the following ratings of Cimento Tupi S.A. (Tupi):
--Foreign currency Issuer Default Rating (IDR) to 'B-' from 'B';
--Local currency IDR to 'B-' from 'B';
--Senior unsecured notes due 2018 to 'B-/RR4' from 'B/RR4';
--Long-term National Rating to 'BB+(bra)' from 'BBB-(bra)'.
The Rating Outlook remains Negative.
The downgrade reflects the company's inability to delever or improve its liquidity position despite solid growth in sales volumes during 2014. Tupi's 'B-' ratings reflect its small business position, high leverage and the volatility of its cash flow generation due to the cyclicality of the cement industry.
KEY RATING DRIVERS
Liquidity Is Deteriorating:
Tupi's poor liquidity position has not improved during 2014. Tupi had cash and equivalents of BRL53 million which compared unfavorably to short-term debt of BRL129 million as of Sept. 30, 2014. The levels of short-term debt coverage as measured by cash plus free cash flow (FCF)/short-term debt was -0.2x for latest 12 months (LTM) Sept. 30, 2014 compared to 0.0x at Dec. 31, 2013.
Sustained High Leverage:
Tupi has been unable to decrease its leverage since the completion of its expansionary capex plan in 2013. Per Fitch's Methodology, net leverage was 7.2x for the LTM period ended Sept. 30, 2014, which compared unfavorably to net leverage of 6.9x at 2013. Fitch believes the company will have a difficult time delevering its business during 2015 as increasing cement sales volumes will not generate enough cashflow to significantly change the financial position of the company.
Negative Cash Flow:
Tupi generated cash flow from operations of negative BRL3.9 million for LTM ended Sept. 30, 2014 compared to negative BRL132 thousand for 2013 due to working capital needs and lower net income. FCF has been negative for the past three years and Fitch does not expect FCF to turn positive in 2015, hampering Tupi's ability to restore its liquidity base.
Weak Business Profile:
Tupi's small production scale heightens the risk of its exposure to the volatility of the cement industry. Tupi had a 2.7% market share in the domestic market and 5.8% of market share in the southwest region during 2013. Tupi has a higher cost structure than the larger integrated Brazilian cement producers due to its small size. The strong credit profile of these conglomerates may allow them to pressure prices, which would negatively affect Tupi's cash flow and ability to service its debt.
No Geographic Diversification:
Tupi's production facilities are concentrated solely in the southeast region of Brazil, with operations in Minas Gerais, Rio de Janeiro and Sao Paulo. As a result, revenue is concentrated in these regions, with 58% of sales derived from retailers and wholesalers. The lack of geographic diversification limits Tupi's growth potential and also its ability to absorb market share loss from bigger cement players.
RATING SENSITIVITIES
Negative Rating Action:
Further downgrades could result from the company's inability to reduce its high leverage position and improve its weak liquidity position.
Positive Rating Action:
Key considerations for a positive rating action or outlook would be a significant deleveraging process, coupled with stronger than expected volume growth and solid operations over the medium term. Fitch would consider a Stable Outlook if the company is able to reduce and maintain its net leverage to around 5.5x and significantly improve its liquidity position within the next six to 12 months.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'National Scale 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=960256
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