SAO PAULO--(BUSINESS WIRE)--The recent initiatives announced by the Brazilian Government to support domestic ethanol production industry will not materially change industry fundamentals, as the limited size of the proposed tax breaks can result in only minimal cash flow improvement and marginal deleveraging, according to Fitch Ratings.
Fitch highlights that companies with higher production mix flexibility, and the companies whose strategy is more focused on ethanol production, should benefit more by the recent measure, assuming sugar prices remain depressed.
On April, 23 2013, Brazilian Federal Government announced a set of measures seeking to promote investments to support expansion in the ethanol production and, to some degree, increase the competitiveness of ethanol versus gasoline as it may limit inflation pressures. The first of two government incentives will provide PIS and COFINS tax relief of BRL 120.00 per m (BRL 0.12 per liter). Producers are expected retain the bulk of profitability gains related to the new policy, with around 10% of total profitability gains in the industry being spread throughout the entire production distribution chain.
The tax incentives as well as the previously announced increase mix of anhydrous blending into gasoline to 25% from current 20%, will likely shift the sugarcane crushing mix more toward ethanol production to around 54% in the current harvest compared to the current mix of 50.5% in the 2012/2013 harvest. Fitch considers a 46% sugar/54% ethanol production-mix to be consistent with the companies' relative production flexibility and the natural dynamics of the sugar and ethanol industry. Additionally, the benefit in the ethanol profitability to producers should partially offset recent years' shrinking margins as a result of higher production, and lead to an increase in the competitiveness of hydrous ethanol versus gasoline.
The second of two main government incentives is to expand credit lines for the renewal and expansion of sugarcane crops (Prorenova) at lower financial costs, with funds provided by BNDES. While this incentive is positive given the relative size of the increase in credit, Fitch does not foresee any greater benefit to the industry as these resources are passed on by financial institutions, the policy will not result in broader lending across the industry, but rather will continue to exclusively benefit those companies with the strongest credit profiles. A total of BRL 4 billion credit lines should be available to producers to finance crop investments at 5.5% per year and extended terms of up to 6 years. Inventory lines of credit costing 7.7% per year have been also announced.
The new policy will affect industry players differently depending on their preexisting strategies and financial positions. Within Fitch's publicly rated companies, Aralco S.A. Industria e Comercio (Aralco), with its 66% focus on ethanol production, should particularly benefit from the announced measures. Companies with higher financial flexibility such as U.S.J. Acucar e Alcool S.A. (USJ) and Raizen are more likely to benefit from long-term lower cost facilities of Prorenova.
Currently, Fitch Rates Industry companies as follows:
Aralco S.A. - Industria e Comercio (Aralco)
--Long-term foreign currency Issuer Default Rating (IDR) 'B';
--Long-term local currency IDR 'B';
--Long-term national rating 'BBB-(bra)'.
Aralco Finance S.A.
--Proposed Unsecured Senior Secured Notes Issuance 'B/RR4'.
Cosan S.A. Industria e Comercio
--Long-Term IDR 'BB+';
--Local Currency IDR 'BB+';
--National Long-Term Rating 'AA-(bra)'.
The Ratings Outlook is Stable.
Cosan Overseas Limited
--Long-Term IDR 'BB+';
--Senior Unsecured Perpetual Notes 'BB+'.
The Rating Outlook is Stable
Cosan Luxembourg S.A.
--Senior Unsecured Notes 'BB+'.
Cosan Finance Limited
--Long-Term IDR 'BBB';
--Senior Unsecured Notes 'BBB'.
The ratings outlook is stable
Raizen Energia S.A.
--Long-Term IDR 'BBB';
--Local Currency IDR 'BBB';
--National Long-Term Rating 'AAA(bra)'.
The Ratings Outlook is Stable.
Raizen Combustiveis S.A.
--Long-Term IDR 'BBB';
--Local Currency IDR 'BBB';
--National Long-Term Rating 'AAA(bra)'.
The Rating Outlook is Stable.
Tonon Bioenergia S.A. (Tonon)
--Long-Term IDR 'B';
--Local Currency IDR 'B';
--Senior Unsecured Notes 'B/RR4'.
The Ratings Outlook is Stable.
U.S.J. - Acucar e Alcool S.A.
--Long-Term IDR 'BB-';
--Local Currency IDR 'BB-';
--National Long-Term Rating 'A(bra)'.
The Ratings Outlook is Stable.
Senior Unsecured notes 'BB-/RR4'
Virgolino de Oliveira Acucar e Alcool S.A. (GVO)
--Long-Term IDR 'B';
--Local Currency IDR 'B';
--National Long-Term Rating 'BBB(bra)'.
The Ratings Outlook is Stable
Virgolino Finance
--Foreign and local currency IDR at 'B';
--Senior unsecured notes at 'B/RR4'.
Additional information is available at 'www.fitchratings.com'.
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