Fitch Affirms Rumo's Rating; Outlook Revised to Stable

RIO DE JANEIRO--()--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.

KEY ASSUMPTIONS

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.

RATING SENSITIVITIES

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.

LIQUIDITY

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:

Rumo

--Long-Term Foreign and Local Currency IDRs at 'BB-';

--National Long-Term Rating at 'A(bra)';

ALL

--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.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012909

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or
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or
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or
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Contacts

Fitch Ratings
Primary Analyst
Gisele Paolino
Director
+55-21-4503-2624
Fitch Ratings Brasil LTDA
Praca XV de Novembro, 20 / 401-B
Rio de Janeiro, RJ 20010-010
or
Secondary Analyst
Claudio Miori
Senior Analyst
+55-11-4504-2207
or
Committee Chairperson
Ricardo Carvalho
Senior Director
+55-21-4503-2627
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com