Fitch Affirms Localiza's IDR at 'BB+'; Outlook Negative

CHICAGO--()--Fitch Ratings has taken the following rating actions:

Localiza Rent a Car S.A.'s (Localiza):

--Long-Term Foreign-Currency (FC) IDR affirmed at 'BB+';

--Long-Term Local-Currency IDR affirmed at 'BBB';

--Long-term National Scale Rating affirmed at 'AAA(bra)';

--Unsecured sixth, seventh, ninth, 10th debenture issuance affirmed at 'AAA(bra)'.

Fitch has also assigned a 'AAA(bra)' rating to Localiza's Unsecured 11th debentures issuance up to BRL500 million due 2022.

The Rating Outlook for Localiza's Long-Term Foreign-Currency IDR is Negative due to Brazil's 'BB+' Country Ceiling rating, which constrains the rating and the Outlook of the sovereign's 'BB' Long-Term Foreign-Currency IDR.

Localiza's operations are essentially in Brazil. The company does not have assets or substantial amounts of cash held abroad. The Rating Outlooks for Localiza's Local-Currency IDR and its National Scale Rating are Stable.

Localiza's ratings reflect its dominant business position within the car and fleet rental industry in Brazil, strong operational efficiency, robust liquidity, and continued commitment to a conservative capital structure. Localiza's business model allows the company to adjust operations to economic cycles, which has limited the negative impact from Brazil's historic economic downturn.

Fitch expects Localiza's performance to gradually improve during 2017, as inflation and interest rates are on declining trends. Localiza's sizable pool of unencumbered fleet vehicles is considered a source of liquidity and further bolsters its financial flexibility. Negatively, the competition from its competition is becoming more intense, as these companies have improved their financial profiles.

KEY RATING DRIVERS

Competitive Advantages Support Strong Business Profile

Localiza has a very strong competitive position in the Brazilian market. The company's leadership gives it a strong negotiating power with the automobile manufacturers and enables it to efficiently dilute fixed costs while maintaining healthy operating margins. Localiza's used car sales distribution channel further supports its competitive advantages and enhances its financial flexibility. The company has a low cost of financing and strong access to credit markets, which further enhances its competitiveness.

Profitability and Operating Cash Flow Under Pressure

Localiza's desire to grow its market-share in this negative environment, marked by high inflation and elevated interest rates has pressured its profitability. During the LTM ended Sept. 30, 2016, consolidated rental revenues grew 7% from 2015, reaching BRL4.1 billion, while operating fleet growth was 9%. In the same period, EBITDAR and funds from operations (FFO) were relatively stable at BRL1.1 billion and BRL2.6 billion, respectively. During 2015, these figures were BRL1.1 billion and BRL2.5 billion. Localiza's EBITDAR margin declined to 27.1% during the LTM, which compares unfavorably with the historical range of 29% and 31%.

Modern Fleet

The car and fleet rental industry demands significant investments in fleet to support business growth. The company has successfully developed an asset sales strategy that allows it to sell around 75,000 used vehicles per year. This has enabled Localiza to sell vehicles consistently, including during the negative cycles of the industry and difficult economic environment. While light vehicle sales in Brazil dropped 14.4% through the first 9 months of 2016, Localiza's sales declined by only 3.4%; average prices were up 8.6%. Its strategy to operate with a modern fleet allows it to postpone fleet renewal, while its strong sales channel helps it to maximize sales prices. The proceeds from car sales have largely funded fleet renewal, given the significant discounts obtained from auto manufacturers for new vehicles.

Fleet Growth Pressured Free Cash Flow

During the LTM ended Sept. 30, 2016, capex for fleet renewal totaled BRL2.6 billion, and capex for growth reached BRL455 million. Helping to offset these disbursements, proceeds from used car sales totaled BRL2.1 billion. Localiza reported negative FCF of BRL445 million during this period after distributing dividends of BRL40 million. During difficult scenarios for the industry, Localiza has had the flexibility to improve its FCF generation by lowering its capex expenditures, as most of its capital investments are geared toward increasing the size of its fleet. Nevertheless, during 2016 Localiza's strategy was to continue to grow and maintain its leadership position in the Brazilian market.

Strong Credit Metrics

Localiza has a track record of strong credit protection measures. From 2012 through the LTM ended Sept. 30, 2016, Localiza's FFO Adjusted Leverage averaged 1.2x, while its net adjusted debt/EBITDAR ratio averaged 2.0x. Fitch expects Localiza to keep FFO Adjusted Leverage below 1.3x in the long term. For 2016 and 2017, Fitch forecasts FFO Adjusted Leverage ratios for the company of 1.4x and 1.3x. The potential market value of Localiza's relatively modern vehicle fleet is about 1.9x the value of its net debt. Localiza could monetize these assets in the event of a cash flow crisis, since they have not been used to secure the company's existing debt.

KEY ASSUMPTIONS

--Increase of owned vehicles by 15,000-17,000 in 2016 and by 10,000 to 12,000 per year in 2017, 2018 and 2019

--EBITDAR margins in the 26%-29% range;

--FCF negative by approximately BRL400 million in 2017;

--Cash balance remains sound compared to short-term debt;

--Dividends at 25% of net income;

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to a negative rating action:

--Change in management commitment to a strong liquidity position;

--Continued focus on market share at the expense of credit protection measures

--Aggressive competition that continues to lead to declining margins

--Deterioration in leverage ratio, measured by FFO Adjusted Leverage, to more than 1.8x on sustained basis;

--Deterioration of the coverage ratio fleet value to net value to below 1.5x;

Also, a further negative rating action on Brazil's sovereign ratings and country ceiling could result in negative rating action for the company's foreign currency IDR.

Conversely, positive rating actions for the FC IDR are limited by Brazil's country ceiling of 'BB+'. The inherit risk of the fleet and car rental industry limit the upward rating potential of the company's BBB LC IDR.

LIQUIDITY

Localiza's management has adopted a conservative and proactive financial strategy to limit the risks associated with its exposure to the cyclical and capital intensive nature of its business. On Sept. 30, 2016, the company had total adjusted debt of BRL3.7 billion and cash of BRL1.2 billion. Localiza shows a quite strong debt amortization schedule, with cash sufficient to cover all debt coming due until mid-2019. As of Sept. 30, 2016, Localiza reported BRL1.2 billion as cash and marketable securities against BRL591 million of short term debt, resulting in cash/short-term debt coverage of 2.0x and cash + CFFO/ short-term debt ratio of 6.3x. Localiza has shown proven ability to access local capital market.

Localiza's sizable pool of unencumbered fleet is also considered a source of liquidity. As of Sept. 30 2016, the company reported a fleet market value of approximately BRL4.3 billion, which corresponded to net debt coverage of 1.9x.

Additional information is available at '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=1015276

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https://www.fitchratings.com/regulatory

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or
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+55-11-4504-2215
or
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or
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Contacts

Fitch Ratings
Primary Analyst
Debora Jalles
Director
+1-312-606-2338
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Renato Donatti
Associate Director
+55-11-4504-2215
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com