Fitch Assigns 'BB-' First-Time Rating to Rumo; Outlook Negative

RIO DE JANEIRO--()--Fitch Ratings has assigned a first-time rating of 'BB-' to the foreign and local currency Issuer Default Ratings (IDRs) for Rumo Logistica Operadora Multimodal S.A. (Rumo) and 'A(bra)' National Scale long-term rating. The Rating Outlook is Negative.

Rumo's ratings reflect the company's strongly leveraged capital structure, coupled with predictable cash flow generation through the economic cycle and solid business position as a railroad and logistic operator in the Brazilian infrastructure industry. Fitch sees as credit positive Rumo's part of the Cosan Group (Cosan Limited, Foreign Currency and Long-term Currency IDR 'BB'/Stable Outlook), which provides reasonable financial flexibility to the company. The merger with ALL in April 2015 also brought positive perspective for the business, as the combined operations will allow Rumo and ALL to benefit from synergies between the two companies' logistics business models.

The company's Negative Outlook reflects the challenges Rumo faces to improve its currently aggressive capital structure and to finance a huge capex plan amid Brazil's deteriorated macroeconomic and debt environment. Another important challenge will be the company's ability to consistently capture increasing volumes and present a healthier debt maturity schedule in order to improve operating profitability and smooth current refinancing pressures.

Rumo's ratings also consider the announcement of a BRL350 million to BRL650 million capital increase proposal, announced December 3rd. The proceeds of the transaction will enhance Rumo's consolidated liquidity, but will not materially change leverage measures. Rumo's ability to begin the deleveraging process as of 2017, when the greatest part of the medium-term capex program is expected to be finished, is crucial for the maintenance of the rating at the 'BB-' category.

KEY RATING DRIVERS

HIGH LEVERAGE; SLIGHT DECLINE IS EXPECTED BEYOND 2017

Rumo's leverage is high for the rating category. Fitch expects the company to post a net adjusted debt-to-EBITDAR ratio, according to Fitch's methodology, in the 6.3x - 6.5x range during 2015 and 2016 due to the additional debt taken on to finance the capex plan. Fitch expects a decline to below 6.0x from 2017 onwards, when the company is expected to fully benefit from capacity increase and operating margins expansion. The agency expects a gradual decline to below 6.0x just after 2017, when the company will be fully benefiting from the additional capacity and the expected operating margin expansion. On a pro forma basis, considering the latest-12-month (LTM) ended Sept. 30, 2015, the combined entity's net adjusted debt-to-EBITDAR ratio, according to Fitch's methodology, peaked at 8.2x. This figure compares unfavourably to 6.6x in 2014 and 4.3x in 2013.

FCF WILL REMAIN NEGATIVE IN THE FOLLOWING YEARS

Despite the positive trend in Rumo's funds from operations (FFO) going forward, the expected substantial expansion capex plan will prevent the company from generating positive free cash flow (FCF). Rumo is expected to invest about BRL7.4 billion up to 2019, which should result in volume increases of 8% - 10% per year, during the period. According to Fitch's projections, Rumo's consolidated free cash flow is not expected to turn positive before 2018, and will be financed by long term debt.

SOLID BUSINESS POSITION

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 global demand for grains. Although ALL faced some operating challenges during 2014 and 2015, the long-term fundamentals of its businesses remain strong. The company's operating model has demonstrated resilience against adverse global economic conditions through several cycles. The company has shown an ability 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:

--Mid-single digit revenues growth from 2015 to 2018;

--EBITDA margin of about 41% in 2015; gradual increase to 49% in 2017 considering synergies and scale gains;

--Capex of BRL2.8 billion during the second half 2015 and 2016; and BRL4.6 billion from 2017 to 2019;

--Adjusted net debt to EBITDAR, according to Fitch' calculation, at the range of 6.0x - 6.5x in 2015 and 2016 and below 6.0x from 2017 onwards.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

--Rating upgrades are unlikely in the medium term due to the challenges Rumo faces to improve is capital structure while financing its capex plan.

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

--Inability to improve operational cash flow generation through increasing volumes of at least 8% per year and EBITDA margin expansion up to 2017;

--Failure to roll over short-term debt and finance the huge capex in the medium term at competitive credit lines.

LIQUIDITY

On Sept. 30, 2015, Rumo's liquidity was tight, presenting a weak cash-to-short-term debt (including BRL537 million of rental and concession obligations) coverage ratio of 0.4x. The capital increase proposal of up to BRL650 million should contribute to improve the debt coverage ratios and reduce the refinancing pressures. During this period, consolidated cash and marketable securities where approximately BRL949 billion and consolidated total debt was BRL12.8 billion, including BRL1.8 million of rental and concession obligations.

Fitch believes Rumo will be able to properly raise medium to long-term debt during the next 12 months, which will also soften current refinancing risks. The ratings incorporate that Rumo will achieve healthier cash to short-term debt ratios during the investment period; a large part should be financed by credit lines at Banco Nacional de Desenvolvimento Economico e Social (BNDES).

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=996970

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996970

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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
New York
elizabeth.fogerty@fitchratings.com

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
New York
elizabeth.fogerty@fitchratings.com