Fitch Rates Tonon Bioenergia's Proposed Senior Unsecured Notes 'B/RR4'
Fitch Ratings has assigned ratings to Tonon Bioenergia S.A. (Tonon) as follows:
--Foreign and local currency Issuer Default Rating (IDR) 'B'
--USD200 million proposed senior unsecured notes due 2020 'B/RR4'.
The Rating Outlook is Stable.
Net proceeds from this issuance will be used to prepay existing senior secured debt and for working capital needs.
Tonon's ratings reflect the limited scale of its businesses and the company's exposure to the cyclical sugar and ethanol industry, which is characterized by strong price volatility and risks inherent to the agribusiness sector. Tonon's ethanol business is also exposed to industry dynamics with prices linked to Brazil's regulated and gasoline prices. The government energy policies can potentially impact the profitability of the ethanol business.
The ratings also incorporate Tonon's sizeable investment plans for the upcoming years, which should pressure the company's free cash flow (FCF). This risk is somewhat mitigated by the expectation of manageable leverage levels and adequate debt maturity profile. The company's credit metrics and liquidity were benefited by the sale of its cogeneration assets and by a capital injection made by its minority shareholder, which together represented a cash inflow of BRL190 million in the third quarter of 2012.
AVERAGE BUSINESS POSITION IN THE SUGAR AND ETHANOL SECTOR
Tonon is a medium-sized sugar and ethanol company in a fragmented commodity sector in which scale is relevant and volatility is high. The company has 5.7 million tons of crushing capacity per year, distributed in two industrial units located in the states of Sao Paulo and Mato Grosso do Sul. Capital expenditures should increase crushing capacity to 6.7 million tons within years, while maintaining flexibility to produce up to approximately 60% of sugar or ethanol. Sugar production is 100% exported while its ethanol production is 70% sold to domestic market.
LEVERAGE SHOULD REMAIN AT MANAGEABLE LEVELS
Fitch expects the company will be able to manage its net leverage at an adequate level below 3.0x after taking into consideration sizeable investments planned for the upcoming years. Tonon's net leverage was reduced to 2.5x for the latest 12 months (LTM) ended Sept. 30, 2012, compared to 3.9x in March 2011, reflecting the cash inflow in the third quarter of 2012. Fitch's projections consider mid-cycle prices of sugar and ethanol, assuming USD20 cents per pound and BRL1,300 per cubic meters, respectively, for the next harvest periods. The company's results will ultimately depend on the company's ability to complete the necessary investments and increase its capacity utilization within the expected schedule, in order to avoid pressure on its capital structure.
HIGH INVESTMENTS PRESSURE FCF
Fitch expects Tonon to present a negative FCF in the next five years. Up to the 2015/2016 harvest period, total investment should reach approximately BRL790 million, to be mostly used for the maintenance and expansion of sugarcane crops and, to a lesser extent, to increase installed industrial capacity. The investments are crucial to sustain an increase in the company's cash flow from operations (CFFO). In the LTM ended Sept. 30, 2012, the company's CFFO of BRL153 million was able to meet capital expenditures of BRL41 million, with a positive FCF of BRL112 million. Net revenues have been increasing in recent years and the company's EBITDAR margin of 40%-50% is high for the industry. In the LTM ended Sept. 30, 2012, net revenues of BRL524 million and EBITDAR of BRL251 million led to an EBITDA margin of 48%.
ADEQUATE DEBT PROFILE
As of Sept. 30, 2012, Tonon's debt profile was manageable and liquidity position was adequate. The company's debt maturity schedule benefited from the closing of a BRL250 million long-term syndicated loan in September and other long-term export financing transactions. At the end of the third quarter of 2012, the long-term debt portion, excluding leased land obligations, was equivalent to 83% of the company's total debt, compared to 40% and 14% in March 2012 and March 2011, respectively. At the same date, cash and equivalents of BRL130 million was covering short-term debt of BRL121 million by 1.1x. The company should need to refinance part of its debt in the coming years as cash will be used for investment purposes.
KEY RATING DRIVERS
Negative rating actions for Tonon could be triggered by a relevant reduction in operational cash flow, with net leverage above Fitch's expectations of 3.0x. Lower than expected leverage ratios in a scenario of sizeable capital expenditures, coupled with the maintenance of adequate liquidity and a more lengthened debt amortization profile could lead to positive rating actions.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 08, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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