RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has assigned foreign and local currency Issuer Default Ratings (IDR) of 'B-' to Agro Industrial Vista Alegre Ltda (Usina Vista Alegre or UVA), as well as a national scale rating of 'BBB-(bra)'. At the same time, Fitch has assigned foreign and local currency IDRs of 'B-' to UVA Overseas Ltda I. (UVA Overseas). The Rating Outlook is Stable.
In conjunction with these rating actions, Fitch has assigned a 'B-/RR4' rating to UVA Overseas' proposed senior unsecured note issuance of approximately USD150 million due 2018 that will be guaranteed by UVA and Agricola Almeida (not rated by Fitch). The 'RR4' recovery rating on the company's unsecured debt issuance reflects average recovery prospects in the event of default.
UVA's ratings reflect its small business scale and its exposure to the volatility of sugar and ethanol industry. The ratings also reflect UVA's high leverage, tight liquidity, refinancing risks and additional needs to finance its activity expansion and crop investments. The ratings also consider UVA's logistic advantage as it is well geographically located, close to consumer markets and to sugar's exports channels. The ratings further incorporate UVA's attractive cost structure, a result of Brazil's competitive advantage in producing sugar and ethanol and the favorable outlook for ethanol consumption in the country.
Competitive Advantages Offset by Smaller Business Scale:
UVA's scale is small relative to the Brazilian sugar and ethanol market, which is highly competitive. Several of its competitors are larger in size, enjoy broader geographic diversification and have greater access to credit market. UVA's business model counts on a competitive advantage in terms of logistics. Its location near the main Brazilian consumer markets for ethanol, and close location to the main exporting channel in Brazil, the port of Santos, contributes to its margin formation as it sells its products with a premium spread. UVA had recently increased its crushing capacity to around 2.3 million tons. UVA's cash flow generation is subject to volatility of the sugar and ethanol industry, as a result of supply and demand imbalances, governmental agricultural and trade restrictions or other causes.
UVA counts on its affiliated company, Agricola Almeida Ltda (not rated by Fitch), to supply the majority of its crushed sugarcane, harvested in owned or leased lands, mitigating the risks of lack of raw materials, given the current high demand in the Brazilian sugarcane production driven by the high domestic consumption of ethanol and strong prices of sugar in international markets. Agricola Almeida Ltda is also a guarantor of the proposed issuance from UVA Overseas, altogether with Usina Vista Alegre. A large proportion of owned sugar cane plantations lowers vulnerability to rising sugarcane costs but also leads to a comparatively high level of fixed costs. Positively on its business profile, is the increasing presence of operating cash flow from a more stable and predictable segment (energy cogeneration). UVA has a long term contract with one of a Brazilian distributors which contributes with profitable margins and helps to minimize the volatility of the company's core activity (sugar and ethanol).
Favorable Industry Fundamentals Supports Incremental Cash Flow Generation:
UVA generated BRL55 million of EBITDA and BRL48 million of funds from operations (FFO) during the fiscal year ended March 31, 2011 (2010/11). These figures, respectively compare with BRL24 million and BRL8 million during the fiscal year ended March 31, 2010 (2009/10), free cash flow (FCF), defined as cash flow from operations less dividends and investments, was negative BRL35 million in 2010/11. For 2011/12, Fitch expects UVA's EBITDA to be about BRL70 million and FCF will likely be negative due to increasing needs to finance its crop investments and ethanol inventory levels.
High Leverage Expected to Decrease, Tight Liquidity:
UVA's high leverage mainly reflects its expansion program (BRL400 million) that was financed with a mix of own funds (BRL120 million) and debt (BRL280 million). Considering the combined financial statements of UVA and its affiliate Agricola Almeida Ltda, the leverage ratio measured by net adjusted debt to EBITDAR reached 5.3 times (x) in the fiscal year ended March 31, 2011 (2010/11) and 10.0x the previous year (2009/10). FFO adjusted leverage ratio of 5.0x in 2010/11 and 12.5x in 2009/10. This leverage reduction reflects the increase of its crushing operations in the last crop, which consequently benefited its operating cash flow generation. EBITDA margin rose to 46.2% in 2010/11 from 27.2% in 2009/10. Fitch expects leverage to decline going forward as the company increases its production under a scenario of strong price and costs fundamentals.
On March 31, 2011, UVA had BRL364 million of total adjusted debt, based on Fitch calculations. This debt consisted of BRL153 million of BNDES and BRL156 million in banking loans. At this date, UVA had BRL12.8 million of cash and marketable securities and BRL124.5 million of short-term debt. Short-term debt coverage ratios, as measured by cash plus FFO to short-term debt, was weak at 0.4x. UVA intends to repay a portion of short-term banking lines with proceeds from the note issuance.
Potential Rating or Outlook Drivers:
The ratings could be positively affected by a faster than expected deleveraging trend of UVA in the mid-term, with sustainable adequate liquidity position. Negative rating actions could occur if the company is not able to refinance a portion of short-term debt or a significant deterioration in the company's cash generation and operating margins.
Company Profile:
Usina Vista Alegre is a small sized sugarcane mill located in the state of Sao Paulo with crushing capacity of 2.3 million tons of sugar cane (1.7 million crushed in the 2010/12 crop) with capacity to produce ethanol and sugar (with flexibility to achieve 60% of total crushing capacity for each). It also has energy generation fueled by bagasse, with a nominal generation capacity of 60MWh. Its production is fully integrated and counts on sugarcane supplying from affiliate company Agricola Almeida Ltda, that supplied over 80% of UVA's needs with own produced sugarcane produced on own and leased lands.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (July. 12, 2011);
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (Nov. 24, 2009).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489
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