Fitch Downgrades InterCement to 'BB-'; Outlook Revised to Stable

CHICAGO--()--Fitch Ratings has downgraded the Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) of InterCement Participacoes S.A. (InterCement) to 'BB-' from 'BB' and the Long-Term National Rating to 'A+(bra)' from 'AA-(bra)'. The Rating Outlook has been revised to Stable from Negative. A full list of rating actions follows at the end of this release.

The rating downgrades reflect the deterioration of InterCement's credit metrics with limited recovery over the medium term given the harsh scenario for cement sales in Brazil. Fitch expects InterCement's net leverage to remain high around 5.0x, per the agency's methodology, during 2016 with a modest decline to 4.7x in 2017. The Stable Outlook reflects InterCement's adequate liquidity position, with manageable debt maturity profile up to 2018, supporting operating cash flow volatilities in the period.

KEY RATING DRIVERS

Severe Contraction in Brazil's Cement Market to Persist

Cement producers in Brazil will face further headwinds in the second-half 2016 and into mid-2017 as industry fundamentals remain weak amidst the country's economic recession. The unrelenting fall in cement volumes is expected to continue due to increased unemployment levels, higher real estate inventory levels and the still lack of new construction projects over the next 12 months. Fitch expects mid-double digit decline in volumes during 2016.

Decreasing EBITDA Generation From Brazil

InterCement's recent weak performance largely reflects the deterioration in the Brazilian market, which was partially offset by improving results in Argentina. During 2015 and the last 12 month (LTM) period ended on March 31 2016, the company's total consolidated sales volumes dropped 6% and 8%, respectively, with the Brazilian operations declining 16% and 18% in the period. As a result, the company's Brazilian operations only account for 37% of EBITDA, a decline from an average of 42%. During 2015, approximately 60% of InterCement's EBITDA generation was originated within countries rated 'B' or lower by Fitch.

Challenge to Recover Operating Margins

Fitch projects consolidated EBITDA margins to remain around 20% during 2016 with some improvement in 2017, as a result of cost cuttings initiatives and operational efficiencies. Over the last quarters, the company has taken several measures to increase utilization rates on its facilities, reducing fixed costs and minimizing the effect of lower volumes. For 2016, Fitch expects InterCement to generate around EUR455 million of EBITDA, which negatively compares with EBITDA of EUR519 million in 2015 and EUR628 million in 2014.

High Leverage; Slightly Decline in 2017

InterCement's credit metrics have suffered materially over the LTM due to the lower EBITDA generation. Per Fitch's criteria, net leverage ratios achieved 4.5x in 2015 and 5.1x during the LTM March 31, 2016. Fitch projects net leverage to be approximately 5.0x by year-end 2016, declining to 4.7x in 2017. Fitch's leverage ratio calculation differs from the net debt/EBITDA financial covenant that InterCement is subject to on its financial debt. The company is tested annually to report net debt/EBITDA below 4.5x, which it was in compliance with for 2015. Fitch assumptions incorporate that in a scenario of financial covenant breach by InterCement, it would be able to negotiate a temporary waiver with creditors.

Limited Ability to Generate Positive Free Cash Flow (FCF)

Fitch views InterCement's ability to generate positive FCF through the business cycle as a credit positive but it is not sufficient enough to effectively improve the company's capital structure. The company generated EUR75 million of FCF in 2015 despite a 44% decline in cash flow from operations to EUR174 million in 2015 through strict working capital management and reductions in capex. Fitch projects InterCement to generate positive FCF of approximately USD55 million during 2016 on the backs of cash flow from operations of EUR150 million, further capex management, and reduction on dividends outflow.

Fitch considers that InterCement has limited flexibility to enhance capital structure in the medium term. During 2015, the company raised EUR52 million through the sale of non-strategic assets in Brazil (quarries of Guarulhos and Barueri), Paraguay (16% of the capital of Iguazu Cimentos), and additional EUR52 million with the promissory sale of an indirect minority participation in BAESA. Fitch's base case scenario does not envisage any relevant asset disposal during the next quarters that could materially benefit the company's capital structure but other similar agreements to the Paraguay minority stake sale could occur.

Credit Linkage with Corporate Group Incorporated

The ratings factor in InterCement's credit linkage with its holding company, Camargo Correa ('BB-'/Outlook Stable), a large privately owned conglomerates in Brazil. InterCement is viewed as the backbone for Camargo's credit profile as this division accounts for 61% of Camargo's consolidated revenues and 87% of its EBITDA during 2015.

Camargo has a diversified business portfolio, with operations in cement, engineering and construction, textile, homebuilding and also energy and transportation sectors. All of the assets are 100% controlled by Camargo, which excludes energy (CPFL) and transportation (CCR), have undergone strong deterioration in their credit profile over the LTM. Fitch's base case assumes that InterCement is likely not to pay dividends to Camargo during 2016 and 2017. Any further deterioration in the liquidity profile of the holding level with higher than expected refinancing risks arise during 2017 could negatively pressure InterCement's ratings.

Solid Business Position with a Diversified Portfolio

InterCement is as a major global player with a solid market position in key regional markets with operations in South America (Brazil, Argentina and Paraguay), Europe (Portugal) and Africa (Egypt, Mozambique, South Africa and Cape Verde). Fitch views the company's business position as sustainable in the medium term based on its leading business position in the market, strong brand recognition and relevant scale of operations and the strategic location of its cement facilities and quarries.

InterCement ranks among the 10 largest cement companies in the world with total consolidated cement sales of 28 million tons during 2015, and is the second biggest player in the Brazilian market with a market share of 16%, measured by cement sales. The large scale of operations provides InterCement with competitive advantages, principally meaningful cost-efficiencies and integrated logistics. The company maintains a diversified portfolio of operations with cash flow generation, measured by EBITDA, from Brazil, Argentina and Paraguay, Portugal and Africa representing 33%, 39%, 6%, and 21%, respectively, of its total EBITDA in 2015.

KEY ASSUMPTIONS:

--13% decline in Brazilian volumes in 2016;

--7% decline in consolidated volumes sold;

--Dividends relief in 2016 and 2017;

--Lower capex levels from EUR100 million to EUR120 million during 2016 and 2017;

--Maintenance of Robust liquidity profile.

RATING SENSITIVITIES

Negative Rating Action: Fitch would view a combination of the following as negative to credit quality:

--Potential shift towards more shareholder-friendly financial strategy during the next 18 months;

--Inability to reduce its net leverage to around 4.5x within the next 12-18 months;

--Deterioration in InterCement's sound liquidity profile.

Positive Rating Action: A rating upgrade is unlikely over the mid-term. Factors that could lead to a positive rating action:

--Additional proactive steps by the company to materially bolster its capital structure in the absence of high operating cash flow.

--Faster than expected deleverage to below 3.5x on a sustained basis, and consistent FCF generation to pay down gross debt levels.

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity Profile

Fitch views the company's debt amortization schedule as manageable and its cash position as adequate to support operating cash flow volatilities in the short term. Liquidity is sufficient to cover debt coming due until 2018. As of March 31, 2016, InterCement reported cash and cash equivalents of EUR667 million compared to total debt of EUR3.1 billion. The company's debt repayment schedule is manageable with EUR137 million, EUR197 million and EUR255 million of debt amortization through 2016 to 2018. Approximately 54% of InterCement's debt is denominated in Euros and 17% in dollar. InterCement typically hedges 24 months of its short-term maturities through derivative contracts.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings:

InterCement Participacoes S.A.

--Long-Term Local Currency IDR to 'BB-' from 'BB';

--Long-Term Foreign Currency IDR to 'BB-' from 'BB';

--Long-Term National Rating to 'A+(bra) from 'AA-(bra).

InterCement Brasil S.A.

--Long-Term Local Currency IDR to 'BB-' from 'BB';

--Long-Term Foreign Currency IDR to 'BB-' from 'BB';

--Long-Term National Rating to 'A+(bra) from 'AA-(bra).

Cimpor Financial Operations B.V.

--Senior Unsecured Notes unconditionally guaranteed by InterCement Brasil S.A. due 2024 to 'BB-' from 'BB'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: June 29, 2016.

Additional information is available at '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

Parent and Subsidiary Rating Linkage (pub. 10 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869363

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008289

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008289

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, +1-312-606-2338
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Phillip Wrenn, +1-312-368-2075
Associate Director
or
Committee Chairperson
Dan Kastholm, CFA, +1-312-368-2070
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Debora Jalles, +1-312-606-2338
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Phillip Wrenn, +1-312-368-2075
Associate Director
or
Committee Chairperson
Dan Kastholm, CFA, +1-312-368-2070
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com