SAO PAULO, Brazil & CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded the following Issuer Default Ratings (IDRs) of Cosan S.A. Industria e Comercio S.A. (Cosan) and its subsidiaries:
Cosan
--Local and foreign currency IDRs upgraded to 'BB+' from 'BB';
--National
scale rating upgraded to 'AA-(bra)' from 'A+(bra)'.
Cosan Overseas Limited (Cosan Overseas)
--Local and foreign
currency IDRs upgraded to 'BB+' from 'BB';
--Perpetual notes
upgraded to 'BB+' from 'BB'.
Cosan Lubrificantes e Especialidades (CLE; former Cosan Combustiveis e
Lubrificantes S.A. - CCL)
--Local and foreign currency IDRs
upgraded to 'BB+' from 'BB';
--National scale rating upgraded to
'AA-(bra)' from 'A+(bra)'.
The Rating Outlooks for Cosan,
Cosan Overseas and CLE are Stable.
Fitch has also assigned local and foreign currency IDRs of 'BB+' to CCL Finance Limited (CCL Finance) and Cosan Finance Ltd, both on Rating Watch Positive.
CCL Finance
--Local and foreign currency IDRs assigned at 'BB+';
--Senior
unsecured notes due 2014 upgraded to 'BB+' from 'BB'.
Cosan Finance Ltd.
--Local and foreign currency IDRs assigned at
'BB+';
--Senior unsecured notes due 2017 assigned at 'BB+'.
The upgrades reflect Cosan's strong business profile, underpinned by a broader business diversification on a consolidated basis, which should lower cash flow volatility associated with the sugar and ethanol industry, combined with the expectation that the company will operate with a more conservative capital structure both on a stand alone and on a consolidated basis, following the completed joint venture with Shell and the consolidation into Raizen. Although Cosan is in a somewhat weaker credit position compared to Raizen, the company's ratings are strongly linked to Raizen's credit quality, given the size of this joint venture (JV) in relation to its consolidated financial statements. Debt maintained at Cosan's level are indirectly subordinated to those registered at Raizen since Cosan will only have access to Raizen's cash through the flow of dividends received.
The Rating Watch Positive assigned to CCL Finance and Cosan Finance reflects the transfer of unconditional payment guarantees of these notes to Raizen Combustiveis for the former and Raizen Energia, Raizen Combustiveis and Raizen Energia Participacoes for the latter. The guarantees were previously granted by the former CCL (currently called CLE) and Cosan Industria e Comercio S.A, respectively. In Fitch's opinion, CCL Finance and Cosan Finance's bondholders should benefit from a likely lower underlying credit risk linked to the new guarantor, which is closer to the operating assets and to Raizen's cash flow and the pari passu position with its unsecured debt. Raizen's creation strengthens Cosan's strategic position and consolidated cash flow generation which is incorporated into Cosan's ratings.
Fitch will continue to monitor the development of Raizen's business and financial strategies, specially the ambitious growth plan of Raizen and on its financing strategy as well as its strategy towards the integration of the downstream activities, which are important aspects of the ratings and the details have not been fully disclosed. Fitch intends to resolve the Rating Watch Positive assigned to CCL and Cosan Finance after additional information becomes available, which is expected to occur shortly.
Stronger Operational Profile/Challenge to Expand Capacity
With Raizen, Cosan will be a more stable business with a larger contribution of less volatile cash flow from operations, which should represent around 45%-50% of its consolidated EBITDA from 2012 onwards. Main factors contributing to this are the larger fuel distribution activities, the completion of investments made in the logistics segment through Rumo which should begin to generate more cash flow and, to a lesser extent, the increasing contribution of other remaining businesses at the Cosan level, including lubrificants and specialities, conducted through an agreement with ExxonMobil.
The joint venture with Shell has enhanced the business profile in the fuel distribution segment, associated with the larger combined size and market share, as the third largest fuel distributor in Brazil. Moreover, the fuel distribution business generates more predictable cash flows and will represent a more relevant portion of Cosan's consolidated EBITDA, around 30%, considering the company's ability to capture some synergies.
Raizen's main challenges are related to its aggressive growth strategy in order to continue to pursue an active role within the industry as one of the largest players. Raizen seeks to achieve a sugar cane crushing capacity of 100 million tonnes up to 2016, versus around 65 million tonnes in 2011. Considering the currently high investment costs, access to capital at competitive conditions is a key factor to turn Raizen's new projects into economically viable ones. On an ongoing basis, Fitch believes that Shell and Cosan will be able to capture some synergies with the sugar and ethanol businesses in the medium term which should further enhance its cash flow generation.
Cash and Assets Contributions Benefited Financial Profile
On a consolidated basis, Cosan will benefit from Shell's USD1.6 billion cash contribution to Raizen and the unleveraged profile of the downstream activities. Initial capital injection of BRL815 million has already occurred and the remaining balance should be received in June 2012 and 2013, which will be an important funding source to Raizen's ambitious capital expenditures plan. In line with previous expectations, Cosan allocated BRL5.2 billion of net debt into the two JV's, an amount slightly higher than the BRL4.6 billion previously announced. This adjustment is aimed at reflecting some changes that occurred up to Raizen's closing date, mainly related to the raising of new debt from BNDES to finance investments and the acquisition of Usina Zanin, which occurred in February 2011.
As a result, Cosan's consolidated leverage for the latest 12 months (LTM) ended on June 30, 2011, measured by the adjusted total debt-to-EBITDA and net debt-to-EBITDA ratios were 2.0 times (x) and 1.6x, which compare positively to 3.0x and 2.5x posted in March 2011, before the JV effective closing. These ratios are slightly better than Fitch's original estimates.
Consolidated adjusted total debt, including rescheduled taxes and intercompany loans, was BRL5.6 billion, composed of loans from the BNDES and Finame (26%), capital markets instruments (19%), export financing lines (11%), rescheduled taxes net of credits to be received from ExxonMobil (12%), intercompany loans (10%) and other lines (33%).
Solid Credit Metrics at the Holding Company Level
Debt at the Cosan level is structurally subordinated to the obligations of the operational subsidiaries. Considering the estimated dividend cash flow, Cosan should present adequate debt service coverage. As per Fitch estimates, coverage would be above 2.0 times (x) for the coming year.
The robust liquidity position also supports the ratings. As of June 30, 2011, Cosan's cash position amounted to BRL1.3 billion and covered its short-term debt of BRL850 million by 1.5x. Cosan's management strong commitment to maintain a strong credit profile is also incorporated into the ratings.
Potential Rating or Outlook Drivers:
Cosan's ratings are strongly linked to Raizen's credit profile. Therefore, any action related to Raizen's ratings could have an impact on Cosan's ratings. Positive rating actions could be also driven by lower than expected consolidated leverage and more stable and predictable cash flows. Factors that could lead to a Negative Outlook or downgrade 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.
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. 12, 2011);
--'National Ratings Criteria' (Jan.
19, 2011).
Applicable Criteria and Related Research:
Corporate Rating
Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
National
Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
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