CHICAGO--(BUSINESS WIRE)--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%.
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.
--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;
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.
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'.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 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