RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed at 'BB-' the Long-Term (LT) Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) of Rumo Logistica Operadora Multimodal S.A. (Rumo) and ALL - America Latina Logistica S.A. (ALL). Fitch has also affirmed at 'A(bra)' the National Scale Long-Term ratings of Rumo, ALL and its subsidiaries and all of their related debt. The Rating Outlook has been revised to Stable from Negative. A full list of ratings actions follows at the end of this press release.
Rumo's ratings continue to incorporate the company's leveraged capital structure, offset by the high predictability of its cash flow generation under adverse economic conditions through several cycles, and its solid business position as a railroad and logistic operator in the Brazilian infrastructure industry. Fitch sees as credit positive Rumo's affiliation to the Cosan Group (Cosan Limited, FC LT IDR 'BB'/Stable Outlook), which provides reasonable financial flexibility to the company. The merger with America Latina Logistica S.A. (ALL) in April 2015 strengthened their consolidated business profile and generated synergies gains for both companies.
The Outlook was revised to Stable from Negative following the reduction of high refinancing risks in place in late 2015. The company received a capital injection of BRL2.6 billion and issued BRL2.9 billion in new long-term debt due from 2019 to 2023 during the first semester of 2016, in order to repay debt maturing in 2016, 2017 and 2018. Both events strengthened the company's liquidity position and improved its debt maturity profile, easing major short- and medium-term pressures on its cash flows. Rumo's financial flexibility is also supported by the company's capacity to fund its aggressive capex plan with low cost debt and at tenors sufficiently large to accommodate the expected returns from these investments.
The substantial expansion capex plan and negative free cash flows (FCF) expected for the next years constrain the ratings. Another important challenge will be the company's ability to consistently capture increasing volumes seeking for scale gains and increasing operating profitability. Rumo needs to strengthen its business position and improve operating cash flow generation in order to reduce leverage on a sustainable basis.
KEY RATING DRIVERS
Leverage Remains High; Decline Expected for the Medium Term
The BRL2.6 billion capital injection received in April 2016 did not materially benefit Rumo's adjusted leverage, though it enabled the company to reduce its net adjusted debt to BRL10.8 billion as of June 30 2016, adjusted by BRL2.4 billion of leases and concession obligations, from BRL12.3 billion on Dec. 31 2015 (BRL2.2 billion of leases and concession obligations). The company's net adjusted debt/EBITDAR ratio reached 5.3x as of June 2016 LTM, favourably comparing to 6.4x in 2015 on a pro-forma basis that combines both Rumo's and ALL's operations. Fitch does not expect Rumo's net adjusted leverage to improve materially by year-end. Fitch expects a soft deleveraging for Rumo over the long term as the company's balance sheets will remain pressured by the BRL8.2 billion capex expected from 2016 to 2019. Fitch expects Rumo's net adjusted leverage to range from 4.5x to 5.3x over the next three years.
Operating Performance Improvement is Challenging
The company still faces major challenges to capture increasing load volumes and raise its business operations profitability from 2017 onwards following the conclusion of the measures taken to improve its financial profile in 2016. After the performance volatility faced in late 2014 and early 2015, Rumo started to recover volumes from mid-2015 onwards as a consequence of operational efficiencies unleashed by its capex program. Fitch expects railroad volumes to reach 43 million RTK in 2016, negatively affected by agricultural performance within the country, slightly below 45 million RTK in 2015.
Expectation of Negative FCF
The company's sizeable capex plan is expected to lead to negative free cash flows (FCF) of above BRL1.0 billion a year up to 2018. Rumo is expected to invest about BRL8.2 billion up to 2019, which should result in volume increases of 7%-8% per year, according to Fitch's assumptions. The company is expected to finance investment with long-term debt mostly.
Business Profile Remains Strong
The ratings incorporate Rumo's solid business position as the sole railroad transportation operator in the South and Mid-Western regions of Brazil, areas with high growth potential due to stable demand for grains worldwide. While Rumo faced some performance volatility between late 2014 and early 2016, the long-term fundamentals of its business remain strong. The company's operating model has demonstrated resilience against adverse global economic conditions through several cycles. The company has been able to increase cargo volumes in the last years during diverse economic scenarios. Fitch understands that the merger with ALL's operation will strengthen the consolidated business profile as it will combine important operational logistics assets and new business opportunities with Cosan Group's rail operation.
Fitch's key assumptions within its rating case for the issuer include:
--4% volumes decline in 2016; Mid-single digit volume growth from 2017 to 2019;
--5% tariff increase in 2016 and 2017;
--EBITDA of BRL2.0 billion in 2016, BRL2.4 billion in 2017 and BRL2.8 billion in 2018;
--BRL1.9 billion capex in 2016 and BRL6.3 billion capex from 2017 to 2019;
--Adjusted net debt to EBITDAR, according to Fitch' calculation, at the range of 5.3x - 5.5x in 2016 and close to 5.0x in 2017.
Future developments that may, individually or collectively, lead to a positive rating action include:
Net adjusted leverage trends below 4.0x, maintaining strong liquidity and positive debt refinancing schedule
Future developments that may, individually or collectively, lead to a negative rating action include:
--Inability to finance capex with long-term and low cost debt, putting pressure on debt amortization schedule;
--Substantial weakening of current EBITDA margins.
The capital injection of BRL2.6 billion strengthened Rumo's liquidity significantly. The extension of BRL2.9 billion of debt maturing in 2016, 2017 and 2018 also contributed to materially protect the company's current liquidity. As of June 30, 2016, the company reported cash position of BRL1.78 billion and short-term debt of BRL1.82 billion, comparing favourably with BRL0.58 billion and BRL2.12 billion, respectively, in December 2015.
Fitch understands Rumo's liquidity is adequate and sustainable in the long-term, considering the financial flexibility the company has presented to finance part of its aggressive capex plan. The company is not expected to use relevant part of its cash and operating cash flow generation to finance the ongoing investments. The company counts on BRL3.5 billion of long-term debt to be provided by Banco Nacional de Desenvolvimento Economico e Social (BNDES) whose proceeds is expected to be partly received during 2016.
FULL LIST OF RATING ACTIONS
Fitch affirms the following:
--Long-Term Foreign and Local Currency IDRs at 'BB-';
--National Long-Term Rating at 'A(bra)';
--Long-Term Foreign and Local CURRENCY IDRs at 'BB-';
--National Long-Term Rating at 'A(bra)';
--National Long-Term Rating of the 10th debenture issue at 'A(bra)'.
ALL Malha Sul S.A.
--National Scale Long-Term Rating at 'A(bra)';
--National Long-Term Rating of the 3rd debenture issue at 'A(bra)'.
ALL Malha Norte S.A.:
--National Scale Long-Term Rating at 'A(bra)';
--National Long-Term Rating of the 6th debenture issue at 'A(bra)';
--National Long-Term Rating of the 8th debenture issue at 'A(bra)'.
ALL Malha Paulista S.A.
--National Scale Long-Term Rating at 'A(bra)';
--National Scale Long-Term Rating of the 1st debenture issue at 'A(bra)'.
The Rating Outlook for the corporate ratings has been revised to Negative from Stable.
Date of Relevant Rating Committee: October 7th, 2016.
Additional information is available on www.fitchratings.com.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001