RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has downgraded Libra Terminal Rio S.A.'s (Libra Rio) Long-Term Issuer-Default Rating (IDR) to 'CCC' from 'BB' and National Long-Term Rating to 'CCC(bra) from 'AA-(bra)'. Fitch has also downgraded the ratings of Libra Rio's unsecured debentures to 'CCC(bra)' from 'AA-(bra)'. A full list of the rating actions follows at the end of this release.
The multi-notch downgrade of Libra Rio's ratings reflects the swift deterioration of the group's consolidated credit profile and the severe deterioration of its operating cash flow generation, hampering its ability to service impending consolidated financial obligations. Libra Terminais S.A., Libra Terminal Santos S.A (Libra Santos), companies within the group, and Libra Rio have breached debt covenants, which has resulted in BRL1.0 billion of its total consolidated debt of BRL1.6 billion to be reclassified as short-term. There are cross default clauses between the debentures and the other Libra Rio's debt.
KEY RATING DRIVERS
Cash Generation Drastically Affected
Fitch expects 2016 will continue to be a difficult year for business in Brazil, following the weak financial performance in 2015. As a result, it will be challenging for Libra Rio to significantly improve its consolidated credit profile, based solely on its standalone operating fundamentals. This situation may lead to a restructuring of its debt. Fitch's revised base case indicates a continued and material weakening of consolidated EBITDA in 2016, to a range between BRL80 million to BRL90 million, which compares to BRL 183.8 million in 2015 and BRL 344.5 million in 2014 and an average of BRL327 million between 2011 and 2015.
Low Leverage is Past
Consolidated adjusted net debt to EBITDAR ratio increased to 6.3x in 2015 and should continue to climb to above 10x in 2016. This high leverage ratio is expected to only marginally decline to near 7x to 8x in 2017, mainly due to the expected improvement of Libra Rio's operating cash generation, which should benefit from the return of maritime loads that was lost during this year. The improvement is expected to follow completion of the dredging of the Rio de Janeiro port, targeted to finish by year-end 2016. Another positive is the expected gradual improvement of Brazil's businesses environment. Between 2011 and 2014, the group's highest adjusted net debt/EBITDAR ratio was 3.3x against an average 2.4x during the period.
Covenants Breached Accelerates Refinancing Risks
As of December 2015, Libra's consolidated cash position was BRL399 million. This amount does not cover the portion of debt on which the group breached financial covenants; leaving it with limited options should its creditors decide to accelerate. Total debt was basically comprised of BRL 1.2 billion in banking facilities, BRL290 million in debentures and BRL148 million in a financing line with Banco Nacional de Desenvolvimento Economico e Social (BNDES). It also includes BRL326 million in port obligation, according to Fitch's methodology.
Fragile Businesses Profile Due to the Deep Economic Crisis
Libra's business profile, based on the seasoned port operations in Rio de Janeiro and Santos, were previously characterized by high profitability and relatively predictable demand. The company benefited from a long track record of strong and relatively stable operating cash generation, strong CFFO generation and low leverage. The challenges imposed by one of the deepest economic recessions Brazil has ever seen uncovered fragilities to the group's operating model not observed previously.
Libra group's businesses have been severely affected by the strong economic recession in Brazil. The increased competition at the Port of Santos combined with substantial load loss in 2015 by Libra Rio have materially impacted the port activity and EBITDA generation of to the group. Alongside, other market pressures, these events have led to a deep decline in Libra Rio's credit profile These factors continue to weaken the group's operation and significantly pressure its revenues and operating margins. The currency devaluation has also substantially affected the transhipment and storage of importated products, which have significantly higher margins than those for exportation services.
Increased Future Cash Flow Pressure
From 2017 onwards, the group has a significant compulsory investment program totalling BRL800 million until 2027, which should lead to continued negative FCF. These investments are mainly linked to the renewal of the Port of Santos terminal concessions that were awarded in September 2015. Approximately BRL150 million of these investments is scheduled to 2017, with increases in the following years. Among others, the group needs to invest BRL450 million in the Port of Santos terminals up to 2019, relative, mainly related to capacity increase. The financing for these investments must rely on a combination of long-term debt, operating cash flow generation and reimbursements from the concession bodies. During 2015, FCF was negative BRL53 million, after the distribution of BRL115 million of dividends. During four years, out of the last five years, FCF before dividend distribution was positive.
Libra Rio is a seasoned operator in the Port of Rio de Janeiro. It holds a solid concession contract, which began in 1998 and was renewed in 2011 and is set to expire in 2048. This terminal is the third largest operator in the Port of Rio de Janeiro, with 25% of market share. The activities of the group at the Port of Santos started in 1995 and its concession contract was renewed until 2035. In 2015, around 66% and 87% of group Libra's consolidated net revenues and EBITDA, respectively, were generated by the port activity, while the second largest business (logistics) is also closely related to the port business.
Libra Santos and Codesp (regulator) have agreed to begin an arbitration proceeding in relation to pending payments and concession obligations. Given the lack of transparency surrounding the decision process and arbitration term, as well as the amounts and deadlines for payment to be set, Fitch disregarded this variable in its base scenario. Any decision announced will be considered an event which can affect the ratings by different degrees.
Fitch's key assumptions within the rating case for Libra Rio include:
--Decline in Libra Santos and Libra Rio volumes of 50% and 30%, respectively, in 2016;
--Consolidated EBITDA margin contractions to 12 in 2016;
--BRL50 million investment, on a consolidated basis, in 2016; and BRL400 million from 2017 to 2019.
Additional downgrades should take place if the company is not successful on rebalancing its short-term debt.
Positive rating actions are unlikely due to the current situation of weak cash flow generation and refinancing risks.
Libra Holding's consolidated cash position at year-end 2015 was BRL399 million, an unsatisfactory level considering the company's current challenges. Historically, its debt service coverage ratios, measured by cash/short-term debt and cash plus CFFO/short-term debt had remained strong, at 2.1x and 3.2x, from 2011 to 2014. At year-end 2015 such indicators were severely affected by the reclassification of around BRL1.4 billion of debt to short-term, which generated a tight coverage of 0.3x and 0.4x.
FULL LIST OF RATING ACTIONS
Fitch downgrades the following:
Libra Terminal Rio S.A.
--Long-Term Foreign and Local Currency IDRs to 'CCC' from 'BB';
--Long-Term National Rating to 'CCC(bra)' from 'AA-(bra)';
--Long-Term National Rating for the BRL270 million senior debenture issuance due in 2019 to 'CCC(bra)' from 'AA-(bra)'.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form