Fitch Assigns 'B-/RR4' to Rodopa's Bonds Issuance
Fitch Ratings has assigned a 'B-/RR4' rating to the USD100 million unsecured notes maturing Oct. 17, 2017 issued by Rodopa Industria e Comercio de Alimentos Ltda (Rodopa). The notes were issued on Oct. 17, 2012 and are unconditionally guaranteed by its direct shareholder, Forte Empreendimentos e Participacoes Ltda (Forte). The proceeds of the issuance will be used by Rodopa to bolster its liquidity, improve its capital structure, and finance its expansion plan. A full list of Rodopa's ratings is provided at the end of this release.
Rodopa's ratings reflect its small revenue base, its low and volatile operational margins, and weak cash flow generation as a result of the high working capital requirements inherent to the protein industry in Brazil. The company's low operational diversification within the competitive Brazilian beef sector could also exacerbate earnings volatility during challenging periods for the meat industry in Brazil.
Rodopa's tight liquidity and challenging refinancing risk are also factored into the ratings. Despite the plan to use part of the proceeds of the notes to lengthen its debt profile, Rodopa's capital structure is still highly skewed to short-term debt. Cash balances and marketable securities are low at BRL37.1 million as of June 30, 2012. Although Rodopa's leverage metrics are strong for the rating category, the ratings consider that leverage is likely to increase due to the company's expansion strategy.
Limited Diversification And Small Scale Aggravate Industry Risks
The company operates in a very competitive market characterized by volatile earnings and low EBITDA margins. Protein prices are vulnerable to the imbalances between local and international demand and supply, and other factors inherent to the sector. These factors include diseases and climatic conditions; expansion/contraction of the global and local economy; fluctuation in consumers' income, changes in consumer habits; health and trade restrictions imposed by governments; and competitive pressures from other Brazilian or international producers.
Although the company's balance sheet increases and contracts depending on meat and cattle prices, the main source of profit comes from the efficient use of the company's production capacity and the ability to pass the increased cost of raw materials on to consumers. These risks are exacerbated by the company's small base of operation.
Measured by slaughtering capacity, Rodopa is a distant fourth largest beef processor in Brazil. The company is relatively small compared to the three largest companies in Brazil that represent approximately half of the country slaughtering capacity. Rodopa operates with limited operational flexibility, as it relies on only four plants in three Brazilian states and about 77% of its revenues of the first half 2012 came from the domestic market.
Rodopa has benefited from its domestic market focus during the global economic crisis that affected exporters more severely. The company's profitability remains exposed to a possible contraction in the local or the international meat market. Sanitary restrictions or cattle scarcity tend to affect Rodopa's business more severely, when compared with its larger competitors that benefit from a more diversified operational base.
Improving EBITDA Generation Capacity
Rodopa generated consolidated EBITDAR of BRL76 million and negative funds from operations (FFO) of BRL6.8 million (including the subsidiaries' earnings) for the latest 12 months (LTM) to June 30, 2012. This performance compares to consolidated EBITDAR of BRL72 million and FFO of negative BRL4.1 million in 2010. Fitch believes that Rodopa will generate EBITDAR closer to BRL100 million by 2013, provided it succeeds in implementing its business expansion during the next 12 months. Rodopa's EBITDAR margin of 8%-9% is expected to be sustainable, as a result of the gains of scale combined with strategy to keep only profitable operations. This EBITDAR margin range is in-line with the company's peers in the sector.
Negative Free Cash Flow Driven By Growth Plans
Rodopa's ratings also reflect its weak cash flow generation due to high interest costs and large working capital needs. For the LTM to June 30, 2012, the company's cash flow from operations (CFFO) was negative BRL51.4 million, after close to BRL18 million of interest expenses and BRL45 million in working capital requirements due to its growing business.
The company's free cash flow (FCF) generation was further depressed by its investment program of about BRL40 million during 2010 and 2011. Investments are expected to remain at an elevated level of around BRL30 million per year over the next three years. This expenditure is related to the opening of new plants and de-boning facilities, which will almost double slaughter capacity to 4.5 thousand heads per day in 2013, from 2.5 thousand at the end of 2010. As a result, FCF generation is expected to remain negative in 2012 and will not become positive until the investments consolidate.
Leverage Is Manageable But An Increase Is Expected
Rodopa's leverage is moderate, but is expected to increase. For the LTM to June 30, 2012, the company's net debt/EBITDA ratio was 2.2x, but is expected to rise to around 3.0x by the end of 2012 due to the recent issuance of USD100 million of unsecured notes. This expected peak in the company's leverage ratio is still commensurate with the current ratings, and continues to incorporate the above-average risk of the beef industry. Rodopa's net debt/EBITDA ratio should gradually decline to around 2.5x by late 2015, once the company's investments consolidate.
Liquidity Is Tight; Improvements are Expected
Rodopa's liquidity is tight and its refinancing risk is high. As of June 30, 2012, the company had BRL200 million of consolidated adjusted debt, including BRL7 million of rental obligations. Cash and marketable securities of BRL37.1 million cover only 23% of BRL160.3 million of short-term debt as of this date. Fitch believes that the recent notes issuance should make it easier for the company to meet its short-term obligations.
Key Rating Drivers
A downgrade may occur in the case of increased leverage over and above Fitch's expectations of a net debt/EBITDA ratio peak of 3.0x over a prolonged period. This may occur as a result of a more aggressive expansion program, deterioration in operating margins, or weaker liquidity.
The ratings may be positively affected by a sustainable improvement in Rodopa's business profile, combined with maintenance of conservative leverage, consistent improvements in liquidity, and manageable amortization schedule.
Fitch rates Rodopa as follows:
--Foreign and local currency Issuer Default Ratings (IDRs) 'B-';
--National scale rating 'BBB-(bra)'.
The corporate Rating Outlook is Stable.
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' dated Aug. 8, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Fitch Ratings Brasil Ltda., Praca XV de Novembro, 20 - Sala 401 B Centro, Rio de Janeiro - RJ - CEP: 20010-010
Daniel R. Kastholm, CFA
Elizabeth Fogerty, +1-212-908-0526 (New York)