Fitch Rates Votorantim Cimentos (VCSA)'s Notes 'BBB(EXP)'

CHICAGO--()--Fitch Ratings has assigned an expected rating of 'BBB(EXP)' to Votorantim Cimentos (VCSA)'s proposed senior unsecured EUR500 million notes due in 2022. Proceeds from the notes will be used for general corporate purposes, including liability management.

The Rating Outlook is Stable. A complete list of the company's current ratings follows at the end of this release.

KEY RATING DRIVERS

Credit Linked to Votorantim Group:

VCSA is a key operating subsidiary of Votorantim Industrial S.A. (VID) and has historically been the backbone of its parents rating (IDR: 'BBB'). During 2014, VCSA accounted for 50% of VID's EBITDA and 71% of its net debt. VID had BRL24 billion of total debt and BRL7.5 billion of cash and marketable securities as of Dec. 31, 2014. During 2014, VID generated BRL7.1 billion of consolidated EBITDA, which represents an improvement from BRL5.4 billion during 2013. VID's funds from operations (FFO) adjusted net leverage ratio was 3.0x during 2014 and its net debt/EBITDA ratio was 2.3x. These represented improvements from 5.0x and 3.1x, respectively in 2013.

Intercompany Debt Guarantees Reduced but Still Exist Within Votorantim Group:

Several cross-guarantee structures exist within the group. VID has been refinancing a majority of this debt in order to eliminate cross guarantees. VCSA has USD1.25 billion of notes due in 2041, EUR303 million of notes due in 2017, and BRL1.4 billion of outstanding financing with BNDES that have a 100% guarantee from VID. Going forward, all new financing from BNDES to VCSA will not include any guarantees from VID. As of Dec. 31, 2014, 43% of VCSA's total debt had guarantees from VID compared to 88% of total debt as of Dec. 31, 2013. VCSA's remaining guarantees to its related parties was approximately BRL700 million as of Dec. 31, 2014 compared to BRL1.9 billion as of Dec. 31, 2013.

High Leverage Remains:

VCSA's net leverage remained high at 3.4x in 2014. Leverage was elevated due to high capex and a negative impact from BRL depreciation during the year. VCSA's challenge in 2015 is to generate strong cashflow during a period of high capex spending in its Brazilian operations and weaker demand. The anticipated lower sales volumes will be offset to some extent by VCSA's ability to increase cement prices. VCSA has the ability to accelerate its deleveraging through the sale of non-core assets, restricting dividends to its parent VID, and other contingency plans which it has in place.

During May 2014, VCSA received an unfavorable ruling from Brazil's anti-trust agency, CADE, that resulted in a BRL1.5 billion fine and the forced sale of certain ready-mix assets. VCSA has appealed the ruling. The company will post guarantees during the appeal process, which is expected to extend beyond 2015.

Strong Cement Business Position:

VCSA is the world's eighth largest cement company with 54 million tons of installed capacity. VCSA's strength is derived from its 35% market share within Brazil, the world's fourth largest cement. Cement consumption in Brazil grew at a slower pace in 2014 at 1.3% to 72 million tons consumed. Fitch projects VCSA Brazil cement volumes will decline 2%-3% in 2015 as slower growth in the Brazilian economy negatively impacts cement consumption. In the U.S., the company has 5 million tons of capacity in Florida and the Great Lakes region combined. The U.S. market is projected to grow by 8% in 2015 and 10% in 2016 according to PCA forecasts.

In recent years, the U.S. market has been more volatile than the Brazilian market which is expected to shift as the U.S. economy remains strong and Brazil faces potential energy rationing and possible water shortages. Despite the troubling conditions facing Brazil, VCSA has several contingency plans in place to ensure production volumes and operational costs are minimally affected. In EMEA, the company has 16 million tons of capacity in Spain, Morocco, Turkey, Tunisia, India, and China. The company intends to sell its Chinese cement assets, which have neither a strong national or regional presence.

Solid Operating Cash Flow but High Growth Capex Impacting Capital Structure:

VCSA's cash from operations (CFO) was BRL1.9 billion for 2014, down from BRL2.1 billion for 2013. However, growth capex has been high, as VCSA continues to invest in its expansion program in Brazil. Capex was BRL1.4 billion in 2014 compared to BRL1.3 billion in 2013, and is expected to be BRL2 billion in 2015. Since the beginning of 2011, VCSA has increased its production capacity by 9.1 million tons in Brazil and plans to reach total capacity of 37 million tons by 2017. Most of this new capacity will be in the Northeast and Midwest of Brazil, where cement needs are high and margins are favorable. During 2014, dividends to the parent company were BRL382 million which compared favorably to a high level of dividends of BRL986 million in 2013 and BRL2.3 billion in 2012; most of the 2012 dividend was done in anticipation of an IPO which didn't materialize.

Fitch projects free cash flow (FCF) to be negative in 2015 as continued planned investments and flat cash flow from operations will limit FCF generation. FCF improved to BRL177 million during 2014 from negative BRL186 million for 2013 due primarily to the lower dividend payments.

Strong Liquidity:

VCSA's liquidity is very strong. The company's cash position was BRL2.5 billion as of the fiscal year ended Dec. 31, 2014 which compared favorable to its cash position of BRL1.9 billion for fiscal 2013. VCSA's amortization schedule is manageable, with an average debt maturity of 9.3 years. Current cash on hand can cover more than 3.5 years of debt amortization. VCSA internally tries to maintain cash balances of approximately BRL2 billion a year.

Fitch projects VCSA cash balance could drop to BRL1.5 billion in 2015 due to funding needs for capital expenditures and weaker cash flow generation in Brazil. However, VCSA has an extended maturity schedule with no large concentrations of repayment over the next three years. VCSA has strong capital market access in both Brazil and abroad.

Lower Margins in 2014 but Still High Compared to Peers:

VCSA's consolidated margins declined to 27.1% in 2014 compared to 29% in 2013 as EBITDA was negatively impacted by lower volumes in Brazil and difficult operating conditions in the U.S. during the year. Despite the compression, VCSA's margins remain among the highest within its industry globally and higher than any of its large peers. Keys to the company's strong margins are driven by its Brazilian operations, which include a favorable sales mix of bagged to bulk cement, fully integrated operations, and its large presence in every region of the country.

On a consolidated basis, Fitch projects EBITDA margins to remain between 26%-28% in 2015, as consumption of cement in Brazil remains flat making margin recovery difficult. VCSA's EBITDA margins for its Brazil operations remained above 30% in 2014 as lower cement consumption was offset by price increases across the region during the year. The company's margins in North America dropped to 13% in 2014 from 18% in 2013 due to higher fuel costs and operational stoppages despite volume growth in the region over the year.

RATING SENSITIVITIES

Negative Rating Action: VCSA's rating could be negatively affected by a significant deterioration in global macroeconomic and business environment resulting in declining profitability and weaker credit metrics or significantly higher levels of capital expenditures resulting in negative FCF. Fitch expects VCSA to maintain net leverage at 2.5x or below through the cycle, with tolerance during high investment periods. Fitch expects VID to support the company's capital structure during periods of high leverage. A downgrade of VCSA's ratings could take place should such support not be forthcoming. VCSA would also be downgraded should VPAR/VID have negative rating actions.

Positive Rating Action: An upgrade is unlikely until VCSA completes its capex program, exhibits consistent net leverage below 1.0x, and upgrade is given to its parent VID/VPAR. Increased geographic diversification would be viewed positively for the credit.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Low single digit revenue growth;

--2015 cement volumes of -2.5% growth in Brazil, -2% growth in Europe/Asia, and 3% growth in North America, with low positive growth rates for each region from 2016-2018;

--EBITDA margin between 27%-28%;

--Working capital of need of BRL100 million in 2015;

--Capital expenditures of BRL2 billion in 2015;

--Net leverage to remain above 3.25x in 2015;

--Maintaining strong liquidity position in 2015.

Fitch currently rates VCSA as follows:

--Foreign currency Issuer Default Rating (IDR) at 'BBB';

--2017, 2021, and 2041 senior unsecured notes at 'BBB'.

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=984124

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Contacts

Fitch Ratings
Primary Analyst
Phillip Wrenn
Associate Director
+1-312-368-2075
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60604
or
Secondary Analyst
Gisele Paolino
Director
+55 21 4503-2624
or
Committee Chairperson
Dan Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations
Elizabeth Fogerty, New York
+1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Phillip Wrenn
Associate Director
+1-312-368-2075
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60604
or
Secondary Analyst
Gisele Paolino
Director
+55 21 4503-2624
or
Committee Chairperson
Dan Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations
Elizabeth Fogerty, New York
+1-212-908-0526
elizabeth.fogerty@fitchratings.com