Fitch Affirms Raizen's IDRs at 'BBB'

SAO PAULO--()--Fitch Ratings has affirmed Raizen Combustiveis S.A.'s (Raizen Combustiveis) and Raizen Energia S.A.'s (Raizen Energia) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB' and National Long-Term Ratings at 'AAA(bra)'. Fitch has also affirmed at 'BBB' the rating of the senior unsecured notes due in 2017, issued by Raizen Energy Finance Limited, a fully-owned subsidiary of Raizen Energia S.A. The Outlook for the Foreign Currency IDRs is Negative following the Outlook for Brazil's sovereign rating. The Outlook for the Local Currency IDRs and National Scale Ratings is Stable.

KEY RATING DRIVERS

Raizen Combustiveis's and Raizen Energia's investment grade ratings are based on the combined financial strength of the two operational companies (collectively Raizen) and their mutual financial support and cross guarantees provided under the joint venture (JV). Raizen represents an important investment for both its shareholders: Cosan S.A. Industria e Comercio (Cosan, Long-Term Foreign-Currency IDR 'BB+'/Negative Outlook/Long-Term Local-Currency IDR 'BB+'/Stable Outlook/National Long-Term Rating 'AA+(bra)'/Stable Outlook) and Royal Dutch Shell plc ('AA-'/Outlook Negative).

The ratings benefit from Raizen's strong financial profile, underpinned by conservative capital structure and robust liquidity. Fitch's expectation that the company will maintain positive and strong free cash flows (FCF) in the coming years was factored in the analysis. Raizen Combustiveis' stable EBITDA margin and Raizen Energia's expected higher prices for its volatile sugar and ethanol (S&E) businesses were also considered as positive.

Raizen's FC IDRs are two notches above Brazil's country ceiling due to the relevance of Raizen's exports, cash and standby credit facilities provided abroad and presence of meaningful international shareholder in its ownership structure.

Strategic Importance for Shareholders

The ratings incorporate the implicit financial strength and potential support from shareholders. Raizen is the second largest downstream market for Shell globally and is a key vehicle for Shell's growth in the renewable energy sector. Raizen also benefits from Cosan's expertise in the sugar and ethanol (S&E) business. Shareholder commitment is demonstrated by their stand-by USD500 million committed line of credit.

Fitch views Shell's 10-year call option to be credit positive. Under the JV agreements, Shell has a call-option to acquire the remaining 50% of the JV from Cosan at the 10th and 15th anniversary of the partnership.

Increased Contribution from Downstream Activities

The downstream business has increased its importance in the combined results for Raizen, which is accretive to ratings as it reduces the potential negative impact from the S&E industry cash flow volatility. The downstream business accounted for approximately 43% of Raizen's EBITDAR and cash flow from operations (CFFO) in fiscal 2016, favorably comparing to 31% and 36%, respectively, for fiscal 2012. Fitch forecasts the downstream business to stay within the 40% - 45% range as a proportion of Raizen's EBITDAR over the next two years.

Raizen's ratings incorporate the representative market shares the company holds in its businesses. The company is the third largest fuel distributor in Brazil with a 20% market share in March 2016. In the S&E industry, the company is the leading global producer, with an 11% share in Brazil's fragmented market, and the country's largest generator of energy from sugar cane bagasse.

Expectation of Positive FCF

Fitch expects Raizen to continue generating strong operational cash flows over the next four years. For the fiscal 2016, Raizen's consolidated funds from operations (FFO) and CFFO were BRL4.3 billion and BRL4.1 billion, respectively. CFFO was sufficient to finance capex and dividends of BRL4.1 billion, which resulted in FCF at breakeven level. Fitch believes Raizen has the flexibility to reduce these payments if needed to maintain a strong credit profile. The agency projects positive FCF as sugar prices are recovering and expansion capex in the S&E business is reduced. As of March 31, 2016, net revenues and EBITDAR of BRL74 billion and BRL6 billion, respectively, translated into margin of 8.1%, in line with the 8.0% reported for fiscal 2015.

Adequate Operational Performance

Raizen Combustiveis and Raizen Energia present adequate performance for their individual businesses. Raizen Combustiveis benefits from its large scale as the third largest fuel distributor in the country, with sales volumes of 25 billion liters in fiscal 2016, flat compared to fiscal 2015 despite country's challenging economic scenario. EBITDAR margin of 4.1% in fiscal 2016 is consistent with previous years.

Raizen Energia's EBITDAR margin of 29% in fiscal 2016 is below its peers due to a cane origination mix that favors a more balanced proportion between own and third party cane. The company presents high mechanization levels in both planting and harvesting activities and agricultural yields compared to industry average. Crushed volumes improved 10% in fiscal 2016 over the previous year and the steep recovery of sugar and ethanol prices seen in the second half of 2015 contributed to Raizen Energia's stable profitability.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

-- Crushed volumes near 62 million tons in 2016/2017, increasing 1% per year in each crop season;

-- Product and sugar cane origination mixes relatively unchanged compared to the 2015/2016.

-- Capex to be significantly reduced at Raizen Energia following the end of the expansion program;

-- Average sugar prices at USD16 cents/pound from 2016/2017 on;

-- FX rate of BRL4 during the entire projection period.

-- 7% increase in domestic ethanol prices in 2016/2017.

-- Sales drop of 5% in the downstream business in fiscal 2017 and sales growth rate in line with historical average for the following years.

-- Dividend payouts as high as it takes for the company to remain with a net leverage below 2.0x, coupled with positive FCF and excess of cash over short-term debt position.

RATING SENSITIVITIES

Deterioration of capital structure due to excessive dividend payouts or large debt-financed acquisitions and weaker operating cash flow generation that would lead to a net leverage ratio above 2.5x on a consistent basis, could trigger a downgrade. Any evidence of a decrease in business importance to Shell could also pressure Raizen's ratings. Also, the impact of a new potential downgrade of Brazil's Sovereign Rating on Raizen's FC IDR would be evaluated as the company's FC IDR can stand between two and three notches above Brazil's country ceiling.

An upgrade is unlikely in the short term due to the inherent volatilities in the S&E industry and uncertainties relating to fuel policies in Brazil.

LIQUIDITY

Raizen has a track record of maintaining a strong credit profile, underpinned by low leverage and robust liquidity position. As of March 31, 2016, Raizen had BRL4.3 billion of cash and marketable securities, excluding restricted cash, and BRL2.5 billion of short-term debt, yielding a 1.7x coverage ratio. This ratio compares unfavorably with 2.5x coverage ratio reported for March 31, 2015, but it remains at a robust level considering the positive FCF forecast by Fitch for the next four years. The stand-by committed credit facility from shareholders in the amount of USD500 million also strengths Raizen's liquidity profile.

Raizen's total adjusted debt amounted to BRL16.4 billion as of March 31, 2016, which included inter-company loans and tax financing that should be reimbursed to both Cosan and Shell in the context of the creation of the JV in 2011. These loans are fully covered by judicial deposits and other non-current financial assets. Raizen's net adjusted debt/EBITDAR stands at a conservative 1.7x when these intra-group related debts are excluded from the calculations.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Raizen Energia

-- Long-Term Foreign-Currency IDR at 'BBB';

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

-- National Long-Term Rating at 'AAA(bra)'.

Raizen Combustiveis

-- Long-Term Foreign-Currency IDR at 'BBB';

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

-- National Long-Term Rating at 'AAA(bra)'.

Raizen Energy Finance Limited

-- Senior unsecured notes due 2017 at 'BBB'.

The Outlook for the Foreign-Currency IDRs is Negative. The Outlook for the Long-Term Local-Currency IDRs and National Long-Term Ratings is Stable.

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

National Scale Ratings Criteria (pub. 30 Oct 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Rating Non-Financial Corporates Above the Country Ceiling - Effective from 2 February 2015 to 21 June 2016 (pub. 02 Feb 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=859368

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1007822

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Contacts

Fitch Ratings
Primary Analyst
Claudio Miori, +55-11-4504-2207
Associate Director
Fitch Ratings Brasil Ltda
Alameda Santos, 700 - 7th, Sao Paulo, SP, CEP 01418-100
or
Secondary Analyst
Alexandre Garcia, +55-11-4504-2616
Associate Director
or
Committee Chairperson
Ricardo Carvalho, +55-21-4503-2627
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Claudio Miori, +55-11-4504-2207
Associate Director
Fitch Ratings Brasil Ltda
Alameda Santos, 700 - 7th, Sao Paulo, SP, CEP 01418-100
or
Secondary Analyst
Alexandre Garcia, +55-11-4504-2616
Associate Director
or
Committee Chairperson
Ricardo Carvalho, +55-21-4503-2627
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com