Fitch Affirms Coazucar's IDRs at 'BB'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has affirmed the Long-Term Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) of Corporacion Azucarera del Peru S.A. (Coazucar) at 'BB'. Fitch has also affirmed Coazucar's senior unsecured notes at 'BB'. The Rating Outlook has been revised to Stable from Negative.

KEY RATING DRIVERS

Stable Outlook:

Coazucar's Stable Outlook reflects the company's improving results and lower leverage due to increased sugar sales and improved prices. New production coming from the first phase of the Agrolmos green-field project is expected to start in the fourth quarter of this year and will further improve the company's competitive position and pricing power in the Peruvian market.

Strong Equity Holder:

Fitch factors into the ratings and Stable Outlook the financial support from Coazucar's shareholders, the Rodriguez family. Coazucar's shareholders injected USD25 million in cash as related debt to be converted into equity in the second quarter of 2016 (2Q16) to preserve liquidity while the Agrolmos green-field project is being completed. During September 2014, they injected USD30 million into the company and converted USD26.2 million of related debts into equity. The shareholders also contributed USD24 million worth of assets for the Agrolmos project, which includes a USD9 million production plant. Other investments of the Rodriguez family include Gloria, the leading dairy company in Peru, and Yura, the leading cement producer in southern Peru.

Declining Leverage:

Fitch expects Coazucar's gross leverage (total debt/EBITDA) to be below 4.0x by year-end (YE) 2016. Leverage was reduced to 4.5x in 2015 from 5.4x in 2014 due to higher cash flow generation. Coazucar's total debt of PEN1.532 billion as of March 2016 is mainly related to its outstanding unsecured notes due in August 2022. Coazucar launched a tender offer in November 2015 and bought back 25% (USD82.1 million) of its international bonds to reduce FX risk. More than 75% of Coazucar's debt is dollar-denominated without any hedge against local currency depreciation. Coazucar's revenues are tied to dollar-denominated international prices of sugar while its operating costs are mainly in local currency which offsets some of its FX risk.

Improving Results:

Coazucar's EBITDA was PEN352 million during the last 12 months (LTM) ended March 31, 2016, which positively compared to PEN325 million in 2015 and PEN268 million in 2014. The price gap between Coazucar's brown and white sugar premium prices in Peru versus international prices has shown a positive trend since the 4Q14 due to lower sugar production from its local competitors. The company started to import sugar in late 2015 and increased production of refined sugar in its new refinery located in Casa Grande in Peru. Coazucar's imports will be replaced by new production coming from the Agrolmos project.

Fitch expects Coazucar's EBITDA margin of 21.7% as of LTM March 2016 to improve to more than 23% as a result of new production coming from Agrolmos and diversification into the production of high-margin white refined sugar.
Strong Business Position in Peru:

Coazucar is the largest sugar producer in Peru with a 50% market share. It has a low-cost structure and still high operating margins that stem from its proximity to owned sugarcane fields, lower dependence on third-party producers, and some of the world's highest sugar cane yields per hectare as a result of its favorable geographic location that allows for a continuous growing period. Coazucar has become a relevant importer of sugar. The company's strategy is to cover the local demand as total sugar production in Peru decreased 9.6% in 2015 compared to 2014. Coazucar total imports in 1Q16 were 54 thousand tons of raw sugar (47% of total sugar imports in the country) to be refined and sold locally.

Product and Geographically Concentrated:

The ratings incorporate risks associated with product concentration in sugar, which represented 86% of Coazucar's revenues in 2015. The remaining 14% is explained by alcohol and other by-products. The company can now easily shift production from raw to refined white sugar. By nature, the sugar industry is volatile and exposed to fluctuations in commodity prices and external factors such as the El Nino phenomenon. Coazucar is geographically concentrated in Peru with about 70% of its revenues generated in the country; it also has operations in Ecuador and Argentina. EBITDA from Peruvian operations accounted for 92% of the total EBITDA in 2015, an increase from 82% in 2014.

Agrolmos' New Production:

The company has planted 8,059 hectares of sugar can developed a plant with a crushing capacity of 5,600 MT/day in the first phase of the Agrolmos project. Fitch expects the Agrolmos project to start operations in 4Q16 and produce around 130-140 thousand tons of sugar per year at the first phase (around 15% of 2015 Coazucar's total production). Total investment for the project has amounted to approximately USD180 million as of Dec. 31, 2015, so the remaining investment for the first phase (USD120 million) is expected to be disbursed within the next two years. Since 2011, Coazucar has been developing the Agrolmos Project in Lambayeque (north of Peru). In January 2016, Coazucar bought 3,000 additional hectares which will be added to a second phase of the project.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Coazucar include:
--Crushed volumes around 8 million tons in 2016 increasing to 9.4 million in 2017 due to Agrolmos' production.
--Agrolmos project starts production in 4Q16 adding annual production of 130,000-140,000 tons of sugar;
--Average sugar prices at USD16 cents/pound from 2016-2017 on;
--Capex for expansion gradually reduced following the completion of the Agrolmos project;
--Dividends for non-controlling shareholders at the subsidiary level: USD10 million-USD15 million per year;
--EBITDA margin improving to 23%;
--Potential equity injections to preserve liquidity while completing the Agrolmos project.

RATING SENSITIVITIES
A negative rating action could occur if the group's liquidity position deteriorates due to increased capital investment or lower margin without any tangible support from its shareholder. A downgrade could occur if Fitch believes Coazucar's net leverage will exceed 4.0x after 2017.

A positive rating action could occur if Coazucar reduces net leverage below 3.0x on a sustainable basis and improves cash flow through the investment cycle. Tangible support from the shareholder that improves liquidity and lowers leverage also could lead to positive rating actions.

LIQUIDITY

The company reduced its cash position to PEN40.5 million in March 2016 from PEN90.3 million in December 2015 and PEN261 million in December 2014 mainly due to capex for the Agrolmos project. Short-term debt was PEN130.3 million as of March 2016, used for working capital needs to finance imports. Coazucar obtained a two-year bridge loan facility for PEN284 million from local banks during the last quarter of 2015, and then implemented a tender offer and consent solicitation to buy-back 25% of its international senior unsecured notes. Coazucar obtained consent from investors to recover the portion of the baskets that was utilized when the bridge loan was disbursed as long as the maturity date of the new debt is beyond the maturity of its outstanding notes in August 2022. Coazucar is about to announce the refinancing of the bridge loan in the Peruvian capital market. Coazucar strengthened its liquidity position with a shareholder's cash injection of USD25 million (PEN80 million) in 2Q16.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the ratings for Corporacion Azucarera del Peru S.A. as follows:

--Long-Term Foreign and Local Currency IDRs at 'BB';
--Senior unsecured debt at 'BB'.

The Rating Outlook is revised to Stable from Negative.

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=1008645
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008645
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Johnny Da Silva
Director
+1-212-908-0367
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Josseline Jenssen
Director
+511-372-0681
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Johnny Da Silva
Director
+1-212-908-0367
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Josseline Jenssen
Director
+511-372-0681
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com