CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded Cimento Tupi S.A.'s (Tupi) ratings as follows:
--Foreign currency Issuer Default Rating (IDR) to 'CCC' from 'B-';
--Local currency IDR to 'CCC' from 'B-';
--Senior unsecured notes due 2018 to 'CCC/RR4' from 'B-/RR4';
--Long-term National Rating to 'CCC(bra)' from 'BB+(bra)'.
The downgrade reflects the company's inability to deleverage or improve its liquidity position despite solid growth in sales volumes during 2014. Fitch expects Tupi will have difficulty managing its debt service over the next 6-12 months due to its strained cash position, low cash generating ability, and the weakening operating environment in Brazil that has increased refinancing risk for all Brazilian corporates. Tupi's 'CCC' ratings also 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
Tupi's poor liquidity position has been persistent during the last 12 months and prospects are poor for improvement during 2015. The company is reliant on banks willingness to refinance its short term maturities due to its low cash reserves. Given the poor economic conditions in Brazil, Tupi could find itself with restricted access to additional debt or the ability to refinance existing loans which would further stress the company's strained balance sheet. 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. 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 deleveraging 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 BRL4 million for LTM ended Sept. 30, 2014 compared to negative BRL130 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.
Challenging Operating Environment:
Fitch expects cement fundamentals to weaken in Brazil over the next 12 months due to the country's deteriorating economic conditions. While producers with diversified operations are expected to weather the storm, companies with concentrated regional sales volumes could suffer the most due to lack of diversification. Furthermore, potential energy rationing and water restrictions in Brazil would negatively impact cement producers that have limited contingency plans in place. The impact of these restrictions would affect both cement producers capacity utilization levels and demand from its customers resulting in deteriorating cash flow generation.
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.
Fitch's key assumptions within the rating case for the issuer include:
--Low single digit revenue growth;
--EBITDA margin between 20-22%;
--Working Capital of need of USD3 million;
--Capital Expenditures of USD6 million;
--Net Leverage to remain above 7.0x in 2015;
--Limited improvement in liquidity position.
Negative Rating Action:
A downgrade could be triggered by further deterioration of the company's liquidity position due to persistent negative FCF generation resulting in lower cash available to pay down its high level of short-term debt.
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 rating action if the company is able to generate substantial improvement in its FCF which could be used to pay down gross debt levels and improve liquidity.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'National Ratings - Methodology Update' (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
National Scale Ratings Criteria
Evaluating Corporate Governance