SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to Aralco Industria e Comercio S/A (Aralco):
--Foreign currency IDR 'B';
--Local currency IDR 'B';
--National Scale Rating 'BBB-(bra)';
--Rating Outlook Stable.
Aralco Finance S.A. (Aralco Finance)
--Proposed US$200 million senior unsecured notes due to 2020 'B/RR4'.
Aralco Finance is a wholly-owned subsidiary of Aralco.
The notes are unconditionally guaranteed by Aralco, Industria e Comercio Destilaria Generalco S/A; Alcoazul S/A Acucar e Alcool; Figueira Industria e Comercio S.A. and Agral S.A. - Agricola Aracangua, which are operational subsidiaries that fully consolidated into Aralco's financial statements. Net proceeds from this proposed issuance will be used to refinance existing senior secured debt and improve company's debt amortization profile.
KEY RATING DRIVERS
Negative rating actions for Aralco could be triggered by continuous reduction in operational cash flow, with net leverage above Fitch's expectations of 5.0x in 2015, and/or inability to refinance short term debt and extend short term maturities over the short term. 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.
RATING SENSITIVITES
Aralco's ratings reflect the company's exposure to the cyclical sugar and ethanol industry. This is characterized by strong price volatility and risks inherent to the agribusiness sector. Aralco?s ethanol business is also exposed to industry dynamics with prices linked to the Brazil's regulated gasoline prices. The government energy policies can potentially impact the profitability of the ethanol business.
The ratings incorporate Aralco's tight liquidity and high leverage, coupled with a robust CAPEX plan for the upcoming years. Both of which chould pressure Aralco's free cash flow (FCF), which in turn will improve its capacity utilization and Cash Flow of Operations (CFFO).
Aralco's position as a shareholder in Copersucar provides company operational and financial advantages. The ratings also incorporate the expectation that Aralcowill be able to execute its refinancing plan and extend maturities over the near term; inability to execute on this plan could put downward pressure on the rating.
Average Business Position in the Sugar and Ethanol Sector
Aralco is a medium-sized sugar and ethanol company in a reasonably fragmented, commodity sector where scale is relevant and volatility is common. Aralco is a shareholder of Copersucar, a cooperative entity, which provides logistics, trading, risk management and financing for its members. This reduces demand risks, lowers logistic costs and provides stability in Aralco's cash flow collections.
Aralco also benefits from less restrictive access to liquidity during challenging operating scenarios when compared to other peers in the sugar and ethanol business, due to the credit lines provided by Copersucar. Aralco holds 5% of Copersucar's total capital.
Copersucar's large scale business accounts for approximately 18% of sugar and ethanol sales in the Central South region of Brazil and 10% of the sugar international market, making it an important market player. Copersucar has 48 partner mills with a combined sugar cane crushing capacity of around 115 million tons per year and also counts on sales contracts with non-partner mills to a lesser extent.
Copersucar Supports Aralco's Operations:
Aralco sells 100% of its production to Copersucar, through a long term exclusive contracts, mitigating demand risk. Prices for its products are linked to the average sugar and ethanol market prices plus a premium (Esalq+2%). The premium is due to logistics savings and scale gains obtained through the contractual partnership with Copersucar. Aralco is responsible for the agricultural activities and for the sugar and ethanol production, while Copersucar is responsible for all commercial activities and associated logistics, as well as for the implementation of hedging policies.
Copersucar remunerates Aralco based on the realized production on a monthly basis during the year, independently of the moment the sale to the final customer occurs. This translates to a higher flexibility in Aralco's working capital management compared to other companies that face seasonality in their activities. Aralco's businesses are exposed to the volatility of the sugar and ethanol prices. However, the risks of future sales operations through derivatives transactions and eventual margin calls remain under Copersucar's responsibility.
Standalone Liquidity is Weak:
As of Dec. 31, 2012, the group reported a cash position of BRL46.2 million that covered only 8% of its short-term debt. Partially mitigating refinancing risk, Aralco's financial profile benefits from a significant working capital financing line, in the amount of up to 40% of its annual revenues, equivalent to approximately BRL200 million, granted by Copersucar. This credit line is subject to certain limits in terms of revenues and it is linked to guarantees on inventories and/or bank guarantees.
This facility is an important liquidity source for Aralco, especially in periods of more restrictive access to credit. Subsequent to the end of 2012, Aralco had refinanced circa BRL154.7 million from its short term bank facilities, and refinanced an extra BRL 172 million of short term tax refinancing. Company seeks to lengthen its debt profile in order to meet up with its expected cash flow generation over the next years.
Leverage and Capex are High
In the 2011/2012 harvest, unfavorable weather conditions decreased its effective crushing volumes by 30% to 4.7 million tons compared to 6.7 million tons in the previous harvest. CFFO was negatively impacted and was negative BRL 90 million in the fiscal year-end (FYE) ended March 2012 comparing to negative BRL 10 million in the FYE ended Dec 2010 and positive BRL131 million in the FYE ended Dec. 31, 2009. From FYE 2009 to FYE 2012 total debt increased to BRL1.043 billion from BRL 580 million, funded mainly by banks (BRL169 million), Copersucar (BRL156 million) and tax refinancing (BRL144 million).
Fitch expects effective crushing volumes to increase for the next several years and consequently, improve CFFO and deleveraging. 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. Aralco's results will ultimately depend on improvements on agricultural productivity and on effective crushing volumes to reduce idle capacity, currently at 33%. Capital expenditures should be high over the next five years, which are expected to be around BRL120 million per year. The high capex should result in a negative FCF until 2015/2016 harvest.
Fitch expects Aralco to gradually reduce its current high leverage levels to levels below 5.0x in the 13/14 harvest. In the latest twelve months ended December 2012, net leverage achieved 7,2x compared to 5.8x in the FYE ended March 2012. Effective crushing should increase in 1.1 million tons to 5.9 million tons in 13/14 as result of BRL 213 million CAPEX, invested in FYE 2012.
Moderate Business Scale
Aralco is a cluster of four industrial unities in the northwest State of Sao Paulo. Its business model benefits from lower agricultural costs in terms of logistics and leasing expenses due to its geographical formation, but its production is limited by lower flexibility in terms of product mix. Two-thirds of its effective crushing is typically directed to both the hydrous and anhydrous ethanol production aimed at primarily the domestic market. Domestic market ethanol prices are linked to the gasoline prices, and even though Brazilian gasoline prices tend to have lower volatility than sugar prices, are subject to federal government energy policies.
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).
Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
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