RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed Cielo S.A.'s (Cielo) Foreign and Local currency Issuer Default Ratings (IDR) at 'BBB' and its long-term national scale rating and debentures issuance at 'AAA(bra)'. Fitch has also affirmed the senior unsecured notes of Cielo USA Inc., Cielo's wholly owned subsidiary, at 'BBB'. The senior notes are unconditionally and irrevocably guaranteed by Cielo.
The Rating Outlook for the foreign and local currency IDR is Negative. The Rating Outlook for the long-term national scale rating is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Cielo's investment-grade ratings reflect the company's solid capital structure and financial flexibility, and its capacity to generate strong cash flow in its business. Cielo benefits from its leading position in the Brazilian card payment industry and the strength and resilience of its business model during various economic scenarios, which is supported by the growing and predictable revenue stream from a diversified base of affiliated merchants.
The analysis also incorporated the low counterparty risks associated with the Brazilian banking system, as more than 90% of credit and debit transactions are settled with investment grade banks, or are guaranteed by Mastercard. The support and the strength of its controlling shareholders, Banco Bradesco S.A. (Bradesco; rated 'AAA(bra)' National Scale; local and foreign currency IDR 'BBB') and Banco do Brasil S.A. (Banco do Brasil; rated 'AAA(bra)' National Scale; local and foreign currency IDR 'BBB-') are also incorporated in the ratings. Regulatory risk is considered manageable.
The Negative Outlook for the foreign and local currency IDRs reflects the Negative Outlook on the Brazilian sovereign ratings.
Leading Position in the Brazilian Card Payment Industry
The Brazilian card payment industry's high barriers to entry support Cielo's strong market position, which is viewed as sustainable in the medium term, despite the highly competitive environment. Cielo is the leading company in Brazil's merchant acquiring and payment processing industry with an estimated market share of 53%. The industry is highly consolidated with the two largest players representing approximately 90% of the market.
Cielo's competitive advantage relies in part on the relationship and distribution network of four important banks in the Brazilian banking system, Banco do Brasil, Bradesco, HSBC and Caixa. Cielo's affiliation with these leading banks gives it access to their broad customer base to acquire merchant accounts and creates high barriers to entry. The penetration of credit and debit cards in Brazil is still low, which supports Cielo's long-term growth prospects.
Low Risk of Credit Loss
Cielo has virtually no direct credit exposure to cardholders, as the card-issuing bank guarantees cardholders' payment, while the company's exposure to merchants is limited. The company is, however, exposed to card-issuing bank defaults on a payment settlement for Visa transactions. The licensing agreement with Mastercard mitigates this risk, as it guarantees the settlement of all transactions. The risk associated with Visa transactions is mitigated by the fact that more than 90% of the volume of credit and debit transactions is concentrated with investment-grade rated banks. For non-investment grade banks, Cielo's risk management policy requires the card-issuing bank to pledge collateral.
Robust Cash Flow
Cielo has the capacity to generate robust and resilient cash flow, even during scenarios of different economic cycles. It also benefits from increased revenues diversification, following the acquisition of Merchant e-Solutions and Cateno. In the LTM ended September 2015, the company generated BRL7 billion of adjusted EBITDA, including financial income derived from the discounting and pre-payment of receivables to merchants, BRL5.2 billion in funds from operations (FFO), and BRL1.8 billion in cash flow from operations (CFFO). Cielo distributed dividends of BRL1.4 billion and invested BRL755 million, resulting in a negative free cash flow (FCF) of BRL303 million in the period.
Fitch expects lower growth of credit and debit transactions in Brazil due to the weak macroeconomic conditions, resulting in lower consumer spending and consumer confidence. Cielo processed BRL518 billion in credit and debit transactions in 2014 and BRL394 billion in the nine months ended September 2015. The volume of credit and debit transactions increased by more than 20% per year from 2007 to 2012 and by an average of 16% in 2013 and 2014. During the nine months ended September 2015, total volume of transactions was up 6% compared to the period of nine months ended September 2014.
Strong Capital Structure
Cielo has strong credit metrics, despite higher debt to finance the BRL8.1 billion capital investment in Cateno. In the LTM ended September 2015, net debt/adjusted EBITDA, including financial income derived from the discounting and pre-payment of receivables to merchants, was 1.7x, compared with 0.6x at the end of 2014. Fitch expects net leverage to decline in the next 3 years. As of Sept. 30, 2015, Cielo had BRL13.4 billion of total debt, of which about 26% was denominated in foreign currency. However, Fitch views the company's FX risk as manageable, as about 30% of cash and 3% of adjusted EBITDA is in foreign currency.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Cielo include:
--Volume of credit and debit transactions to increase by 5% in 2015 and 2016;
--Number of point of sale (POS) increase between 3% and 4% per year;
--Cateno's annual revenues between BRL2.5 billion and BRL3 billion in the next three years;
--Prepaid volume of about 18% of total credit value of transactions;
--Dividends of 30% of net income.
RATING SENSITIVITIES
Future developments that may individually or collectively lead to a negative rating action includes:
--An increase in the volume of credit and debit transactions with non-investment grade banks without collateral being pledged by the card-issuing bank or not guaranteed by Mastercard;
--A weakening credit profile of the main banks that operate with Cielo;
--A significant loss due to fraud and charge-backs;
--Effects on the business caused by the competitive environment and significant changes in the regulatory risk;
--A negative rating action on Brazil's sovereign ratings and country ceiling could result in negative rating action for the company's foreign currency IDR and debt ratings.
Ratings upgrades are not likely. Cielo's foreign currency IDR is already positioned at the same level of Brazil's country ceiling of 'BBB'.
LIQUIDITY
Cielo's liquidity position is strong, and cash and cash flow generation capacity comfortably covers debt maturities. As of Sept. 30, 2015, Cielo had cash and marketable securities of BRL1.3 billion and BRL2.1 billion of short-term debt. About 70% of total cash is invested in Brazil and 30% abroad. Cielo has BRL3.4 billion of debt maturing up to the end of 2016, BRL1.6 billion in 2017 and BRL1.5 billion in 2018. Fitch expects Cielo to reduce total debt in the next couple of years.
FULL LIST OF RATING ACTIONS
Fitch affirmed the following ratings:
Cielo
--Foreign and Local currency IDR at 'BBB';
--Long-term national scale rating at 'AAA(bra)';
--4th Debentures, in the amount of BRL4.6 billion, due in 2018, at 'AAA(bra)'.
Cielo USA Inc.
--Senior unsecured notes, in the amount of USD875 million, due in 2022, at 'BBB'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995371
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995371
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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