Fitch Affirms JSL's IDRs at 'BB'; Outlook Remains Negative

CHICAGO--()--Fitch Ratings has affirmed the local and foreign currency Issuer Default Ratings (IDRs) of JSL S.A. (JSL) at 'BB' and its National Scale Ratings at 'A+(bra)'. The Rating Outlook is Negative. A full list of rating actions follows at the end of this release.

The maintenance of the Negative Outlook reflects JSL's challenge to reduce its leverage ratios in the midst of a recession in Brazil. In addition to soft demand and fierce competition, increasing local interest rates will pressure JSL's operating cash flow, limiting the ability of the company to materially reduce leverage. Given the nature of its business, Fitch considers that JSL has an above-average ability among its 'BB' rating peers to post free cash flow (FCF) generation as it shows relevant flexibility to postpone capital expenditures. Nevertheless, ongoing aggressive growth strategy has so far frustrated this expectation, as the company had decided to boost its rent-a-car operations during 2014 and 2015. Going forward, Fitch expects capex levels to reduce, which may bring some relief to the company's leverage ratios.

KEY RATING DRIVERS

JSL's ratings reflect its strong business profile, supported by a leading position in the Brazilian logistics industry and diversified service portfolio, and its resilient operating performance over the last years, despite sluggish economic growth. JSL's aggressive growth strategy has resulted in increasing leverage. The company's track record of maintaining an adequate liquidity position vis-a-vis its short-term obligations is a key consideration for the ratings. The rating for its debentures is one notch below the corporate rating due to their structural subordination in relation to most of JSL's debt, which is secured by the company's fleet.

Prominent Market Position and Diversified Portfolio

JSL has a leading position in the Brazilian logistics industry with a diversified portfolio of services with relevant presence in multiple sectors of the economy. The company's services include: supply chain management (36% of its net revenue), fleet and car rental business (Movida - 23%), vehicle dealerships (18%), passenger transportation (8%) and general cargo transportation (4%). JSL's strong market position, coupled with long-term contracts for most of its revenues (40%), minimizes its exposure to the more volatile economic conditions. The company's significant operating scale has made it an important purchaser of light vehicles and trucks, giving it a significant amount of bargaining power versus other competitors in the industry.

Consistent Increase in Operating Cash Flow

JSL has been efficiently expanding its business profitability while maintaining solid growth. The integration of its business and cross-selling opportunities has supported gains of scale, benefiting its operating margins. Fitch expects JSL's EBITDA margin to remain resilient around 17% in the near term. Between 2011 and the (LTM) ended Sept. 30, 2015, JSL's net revenue increased by 143%, to BRL5.9 billion. During the same period, the company's EBITDA grew to BRL1.4 billion from BRL430 million while its cash flow from operations (CFFO) rose to BRL1.6 billion from BRL408 million.

More Rational Growth in Movida Could Benefit FCF

Movida's strong business expansion has pressured JSL's FCF during the last 18 months. In that time, around BRL1.7 billion out of BRL2.8 billion of capex was invested in the rent a car business. As of Sept. 30 2015 LTM, Movida's EBITDA generation was BRL260 million out of total EBITDA of BRL1.6 billion.

During LTM Sept. 30, 2015, JSL reported negative FCF of BRL751 million, pressured by BRL2.3 billion of capital expenditures. Fitch expects FCF to remain negative, ranging between BRL400-BRL500 million during 2015 and 2016, and then decline to around BRL250 million in 2017 and 2018. Fitch believes that JSL has the flexibility to improve FCF by reducing growth in capex, as most of its capital investments are geared toward increasing the size of its fleet/equipment and linked to a contract. Considering only renewal capex, JSL's operating cash flow generation is sufficient to support the disbursements. Excluding growth capex, JSL generated BRL869 million of positive FCF during LTM Sept. 30, 2015, compared to BRL619 million in 2013 and BRL449 million in 2012.

Leverage to Remain High in 2016; Improvements Expected for 2017

JSL's leverage, as measured by FFO net adjusted leverage, was 3.0x as of LTM Sept. 30, 2015. Fitch does not expect a material reduction in the near term with net leverage expected to be around 2.8x in 2015 and 2016, with a gradual decline from 2017 on. JSL's leverage relative to its fleet market value is adequate. The company reports a fleet market value of approximately BRL4.5 billion, which is similar to its net debt position. The company's flexibility is limited, however, as only about 49% of its fleet is not used as liens for loans.

KEY ASSUMPTIONS

-- Mid-single-digit revenue growth in 2015 and 2016;

-- Softer but still resilient EBITDA margins at around 17%;

-- Capex at around BRL1.6 billion in 2016 and 2017;

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

-- Dividends at 25% net income;

-- No large-scale M&A activity.

RATING SENSITIVITIES

Positive: Future developments that could lead to a positive rating action:

-- An upgrade is unlikely in the next 12-18 months due to the slow pace of deleveraging;

-- Revising the Outlook to Stable is dependent on the issuer's ability to achieve FFO adjusted leverage of around 2.8x or below by the end of 2016 through greater than expected improvement in operating cash flow generation.

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

-- Obstacles to the company's track record of solid business resilience;

-- EBITDA margins declining below 16% on a sustained basis;

-- FFO net adjusted leverage remaining above 2.8x;

-- Deterioration of sound liquidity compared to short-term debt, leading to refinancing risk exposure.

-- Deterioration of the coverage ratio fleet value-to-net value to below 1.0x;

-- Large debt-funded M&A acquisition or entering into a new business in the logistics sector that adversely impacts JSL's capital structure on a sustained basis or increases its business risk exposure.

LIQUIDITY

JSL's adequate liquidity position vis-a-vis its short-term debt obligations is a key credit consideration, with cash covering short-term debt by an average 1x during the last five years. JSL has a recurring need for debt refinancing, since its debt schedule amortization is still concentrated in the next three years. Up to end-2018 JSL has BRL3.9 billion of debt coming due. As of Sept. 30, 2015, JSL reported total debt of BRL5.9 billion, of which BRL1.4 billion was classified as short-term. This level of near-term debt compares with BRL1.3 billion of cash and marketable securities and BRL300 million of undrawn stand-by credit facilities due in 2018. The ratio of short-term debt coverage, as measured by cash plus CFFO-to-short-term debt, is solid, at 2.0x. About 31% of JSL's debt is secured. The company's debt profile is mainly composed of FINAME operations (26%), banking credit lines (34%), debentures (23%), and leasing operations (5%).

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

JSL S.A.

--Foreign currency long-term IDR at 'BB';

--Local currency long-term IDR at 'BB';

--National long-term rating at 'A+(bra)';

--Local Debentures issuance at 'A(bra)'.

The Rating Outlook is Negative.

Date of Relevant Rating Committee: Nov. 18, 2015]

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995305

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995305

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

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
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com