Fitch Rates Cosan's Proposed Senior Notes 'BB+'
Fitch Ratings has assigned a 'BB+' rating to a proposed senior unsecured notes issue of Cosan Luxembourg S.A. (Cosan Luxembourg), in the amount of USD400 million due 2023. The notes will be unconditionally and irrevocably guaranteed by Cosan S.A. Industria e Comercio (Cosan) and will rank equally with all Cosan's unsecured indebtedness. Net proceeds will be used to prepay a portion of Cosan's BRL3.3 billion debentures issued to finance Comgas' acquisition. A complete list of Fitch's ratings of Cosan is provided at the end of this release.
KEY RATING DRIVERS:
Cosan's ratings reflect the increasing contribution of a more diversified asset portfolio and more predictable cash flow businesses on a consolidated basis, which partially soften the impacts of the volatility of the sugar and ethanol industry. Cosan's ratings fundamental has been positively enhanced by the creation of a joint-venture with Shell Brazil Holdings BV (Raizen), under conservative financial terms, and it is strongly linked to Raizen's credit profile, given the relevance of this joint venture compared to Cosan's consolidated performance (55% of 2013 EBITDA, as per Fitch estimates). Cosan's pro forma credit ratios, considering the last 12 months (LTM) EBITDA of Comgas, its robust liquidity position and its manageable debt profile further support the ratings.
The high volatile sugar & ethanol industry fundamentals, exposure to climatic conditions and challenges related to the ethanol's industry dynamics in Brazil, currently strongly linked to gasoline regulated prices and governmental policies related to this issue, are further incorporated into the ratings.
Increased Diversification & Lower Exposure to Sugar & Ethanol:
Comgas' acquisition was strategically positive for Cosan, as it contributes to broader business diversification and should lessen its cash flow volatility. This transaction also enhanced Cosan's presence in the energy segment, which, together with logistics, are the main focus on the company's business plan going forward. As per Fitch estimates, the contribution of more stable business for Cosan's cash flow should range from 52% in the 2011/2012 harvest period to the 65%-75% range in the next three years, depending on the sugar and ethanol prices behavior and speed of planned expansion projects. Fitch estimates Cosan 2013 EBITDA breakdown by segment as follows: 35% natural gas distribution, 32% sugar and ethanol, 19% fuel distribution, 8% logistics and 6% others.
Leverage on a Declining Trend as Expected:
Cosan's pro forma net debt/EBITDA considering Comgas' LTM EBITDA is 3.2x, despite lower than historical EBITDA margins of the acquired company in that period, due to some cost mismatches to be passed through its tariffs. Considering a normalized EBITDA for Comgas, Cosan's pro forma net leverage on a consolidated basis would be around 3.1x. This ratio compares favorably with the 3.3x pro forma net leverage ratio as of March, 2012. Fitch's debt calculations also consider rescheduled taxes net of credits to be received from ExxonMobil, pension fund obligations (mostly migrated from Comgas) and intercompany loans.
Considering the mid-point of the sugar and ethanol price cycle, the agency estimates that Cosan should maintain its net leverage around 3.0x while preserving a robust liquidity position to reduce the risks related to the inherent cyclicality of some of its businesses.
Robust Liquidity Essential to Support Ratings:
Cosan has maintained robust liquidity. As of Dec. 31, 2012, its consolidated cash position amounted to BRL2.3 billion and covered its short-term debt of BRL1.8 billion by 1.3x. Considering also cash flow from operations (CFFO), the cash+CFFO/short-term debt ratio would be strong at 3.0x. Debt maturity profile was adequately distributed, with concentration in the long term.
Fitch expects that Cosan will continue to adequately manage its short-term debt maturities and to preserve a robust liquidity, in order to be prepared for occasional market downturns. The favorable terms of the financing line obtained to finance the Comgas acquisition, characterized by an eight-year tenor with a two-year grace period, also positively contributed for the company's financial profile.
Increased Cash Flow Generation:
Cosan presented a robust operational performance on a consolidated basis in the LTM period ended December 2012. Net revenues, EBITDA and CFFO amounted to BRL27.3 billion, BRL2.5 billion and BRL3.1 billion, respectively, which compare positively to BRL24.1 billion, BRL2.1 billion and BRL2 billion reported in March 2012, excluding the non-recurring effects of the creation of Raizen (BRL3.2 billion).
Cosan's EBITDA expansion reflects, among other factors, the strong performance of the fuel distribution activities, which benefited from advances in the gas stations rebranding process and a favorable product mix and higher operational margins in the sugar, ethanol and cogeneration business, driven mainly by a greater crushing volume, adequate price hedging strategy and increased cogeneration revenues in that period. The beginning of consolidation of the agricultural land development business, conducted through the subsidiary Radar, also contributed with an incremental EBITDA of BRL96 million.
Pending Negotiations on Acquisition of ALL Shares:
Cosan is also negotiating the purchase of a 5.7% stake on America Latina Logistica (ALL), for BRL896.5 million, which was not incorporated in Fitch's financial projections. The transaction is still dependent upon the approval of other signatories of ALL's shareholders agreement and also from the Brazilian Transport Regulatory Agency (ANTT) and the Brazilian Antitrust Council (CADE). In case the acquisition is concluded, Fitch estimates that Cosan's consolidated net debt/EBITDA ratio on a pro forma basis would range between 3.0x and 3.3x depending on the funding strategy for this transaction.
A positive rating action could be driven in the medium term by lower than expected leverage, coupled with the maintenance of more stable and predictable cash flows.
Any action related to Raizen's ratings could have an impact on Cosan's ratings. Factors that could lead to a negative rating action include further acquisitions or investments not contemplated in the current business plan that could result in leverage levels beyond expectations and/or material refinancing needs. Should net leverage exceed Fitch expectations and be above 3.5x on a recurring basis, it would trigger a negative rating action.
Fitch currently rates Cosan as follows:
--Foreign and local currency Issuer Default Ratings (IDRs) 'BB+';
--National scale rating 'AA-(bra)'.
--Foreign currency IDR 'BB+';
--Perpetual notes 'BB+'.
The Rating Outlook of the corporate ratings 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' (Aug. 8, 2012);
--'National Ratings - Methodology Update' (Jan. 19, 2011).
Applicable Criteria and Related Research
Corporate Rating Methodology
National Ratings Criteria
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