SAO PAULO, Brazil--(BUSINESS WIRE)--Fitch Ratings has assigned foreign and local currency Issuer Default Ratings (IDRs) of 'BB' to Cosan Limited. The Rating Outlook is Stable.
KEY RATING DRIVERS
Cosan Limited's ratings reflect the sound business model of Cosan S.A Industria e Comercio (Cosan; foreign and local currency IDRs of 'BB+' and long-term national scale rating of 'AA(bra)' by Fitch), based on the continuing contribution from a diversified asset portfolio and predictable cash flow businesses that partly softens the inherent volatilities of the sugar and ethanol industry. The ratings also incorporate Cosan Limited's low leverage and satisfactory liquidity on a standalone basis.
The ratings are limited by the group's aggressive expansion plan. The imminent merger with America Latina Logistica S.A. (ALL) is expected to have a negative impact on Cosan Limited's consolidated financials and slow down the potential deleveraging process of the group. The one-notch difference compared to the ratings assigned to Cosan is due to the possibility of new debt being issued by Cosan Limited to finance new acquisitions and the group's aggressive expansion plan. The ratings incorporate the holding company nature and inherent structural subordination of Cosan Limited's debt and the links between the company's operating cash flows to dividends received from Cosan.
Holding Company Nature
Cosan Limited is a non-operating holding company that holds a 62% interest in Cosan, the holding company that controls the group's business units in Brazil. The main components of Cosan Limited's cash flows are the dividends received from Cosan and the dividends paid out to its shareholders.
Sound Business Platform
The group has been reporting the increasing contribution of a more diversified asset portfolio and more predictable cash flows. This has been reducing the relative importance of the sugar and ethanol industry, which presents historically high volatility. Currently, under the new accounting practices, the majority of Cosan Limited's consolidated EBITDA comes from relatively steady operations, such as distribution of natural gas, lubricants and logistics. The sugar and ethanol business, as well as downstream activities, are accounted for through the equity method and therefore they affect Cosan Limited's consolidated financial performance only through the dividends flow.
On a pro-forma basis, Fitch estimates that around 40% of the group's EBITDA comes from sugar and ethanol activities, while the remaining portion is generated by more stable businesses. Cosan Limited has reported a steady increase in dividends received despite the adverse scenario for sugar and ethanol companies in Brazil. Dividends received from Cosan amounted to BRL288 million in the last 12 months (LTM) ended June 30, 2014, which compares favorably with BRL196 million reported for the nine months ended Dec. 31, 2013.
Low Leverage at Holding Level
Cosan Limited posted low leverage on a standalone basis as of June 30, 2014, compared with moderate consolidated leverage. At the holding company level, Cosan Limited's leverage measured as net debt-to-EBITDA plus dividends received was near 1x. On a consolidated basis, the net adjusted debt-to-EBITDAR was 3.6x when dividends received from non-consolidated subsidiaries are factored into EBITDAR figures.
The imminent merger with ALL is expected to have a negative impact on Cosan Limited's consolidated financials and slow down the deleveraging process of the group. Assuming the successful conclusion of the deal with ALL, Fitch believes the expected deleveraging process will be postponed to 2016 when the group is expected to bring leverage ratios down to current levels. Fitch performed another projected scenario under which the deal is not concluded. In this case, Cosan Limited's consolidated net leverage falls to below 3x as soon as 2015. The merger is still pending approval from Brazilian government authorities.
Cosan Limited posted healthy debt coverage ratios on a standalone basis as of June 30 2014. The company's cash plus dividends received covered its short-term debt by 3.7x as of June 30 2014. Cosan Limited posted a cash position of BRL20 million and total debt of BRL267 million, of which short-term debt was BRL71 million.
Cosan Limited's total debt consisted of bank debt taken on to finance the acquisition of Cosan's shares. The group's strong financial flexibility relative to its access to the debt and capital markets, in combination with dividends received from Cosan, ensures strong refinancing capacity for Cosan Limited. The dividends received from Cosan have historically exceeded the dividends paid to Cosan Limited shareholders and the balance is expected to be large enough to cover the expected debt service for the next years.
Fitch does not expect Cosan Limited to raise new bank debt in the short-term, with the only exception being the refinancing of maturities under its existing BRL267 million debt. For the medium term, Fitch incorporates the possibility of Cosan Limited taking on new debt to finance the group's aggressive expansion plan and acquisitions.
Fitch will be monitoring the conclusion of the ALL acquisition and a negative rating action could arise depending on the realization of a potential sizeable capex program at ALL. A downgrade could be triggered if Cosan Limited fails to deleverage to below 3.0x on a consolidated basis in the medium term.
An upgrade is unlikely in the short- and medium-term as the group's growth strategy should continue to make difficult a relevant deleveraging process.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'National Scale Ratings Criteria' (Oct. 31, 2013).
Applicable Criteria and Related Research:
National Scale Ratings Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage