RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'B-' Foreign and Local Currency Issuer Default Ratings (IDRs) of Rodopa Industria e Comercio de Alimentos Ltda. (Rodopa) as well as its 'BBB-(bra)' long-term national scale rating. At the same time, Fitch affirmed the 'B-/RR4' rating on the USD100 million unsecured notes maturing Oct. 17, 2017 issued by Rodopa. The Corporate Ratings Outlook is Stable.
KEY RATING DRIVERS:
Rodopa's ratings continue to reflect Rodopa's tight liquidity and high refinancing risk coupled with a pressured cash flow generation capacity. It also takes into consideration its challenging business profile based on its small revenue base and the low operational diversification within the competitive Brazilian beef sector that could exacerbate earnings volatility during challenging periods for the meat industry in Brazil. These risks are offset by Rodopa's moderately leveraged capital structure. Although Rodopa's net adjusted debt/EBITDAR of 3.6x, as of June 2013 LTM, is moderate to the 'B-' rating category, the ratings take into consideration the industry's above average risks.
Limited Diversification & Small Scale Aggravate Industry Risks
The company operates in a very competitive market characterized by volatile earnings and low EBITDA margins. Protein prices are vulnerable to the imbalances between local and international demand and supply, and other factors inherent to the sector. These factors include diseases and climatic conditions; expansion/contraction of the global and local economy; fluctuation in consumers' income, changes in consumer habits; health and trade restrictions imposed by governments; and competitive pressures from other Brazilian or international producers.
Although the company's balance sheet increases and contracts depending on meat and cattle prices, the main source of profit comes from the efficient use of the company's production capacity and the ability to pass the increased cost of raw materials on to consumers. These risks are exacerbated by the company's small base of operation.
Measured by slaughtering capacity, Rodopa is a distant fourth largest beef processor in Brazil. The company is relatively small compared to the three largest companies in Brazil that represent approximately half of the country slaughtering capacity. Rodopa operates with limited operational flexibility, as it relies on only six plants in four Brazilian states and about 80% of its revenues of the first half 2013 came from the domestic market.
Rodopa has benefited from its domestic market focus during the global economic crisis that affected exporters more severely. The company's profitability remains exposed to a possible contraction in the local or the international meat market. Sanitary restrictions or cattle scarcity tend to affect Rodopa's business more severely when compared with its larger competitors that benefit from a more diversified operational base.
Improving EBITDA Generation Capacity; Adequate Operational Margins
On a consolidated basis, considering also the leather activity, Rodopa generated consolidated EBITDAR of BRL94.2 million and funds from operations (FFO) of negative BRL36 million for the latest 12 months (LTM) to June 30, 2013. This performance compares to consolidated EBITDAR of BRL72 million and FFO of BRL1.2 million, in 2011. Fitch believes that Rodopa will generate EBITDAR closer to BRL100 million by 2013, due to the business expansion provided during the last 12 months. Rodopa's EBITDAR margin in the range of 8%-9% is expected to be sustainable, as a result of the gains of scale combined with strategy to keep only profitable operations. This EBITDAR margin range is in-line with the company's peers in the sector.
Negative Free Cash Flow Driven By Growth Plans
Rodopa's ratings also reflect its weak cash flow generation due to high interest costs, increasing recoverable taxes on exports and large working capital needs, while the company expands. For the LTM to June 30, 2013, the company's cash flow from operations (CFFO) was negative BRL81.4 million, after close to BRL40.9 million of interest expenses and BRL44.1 million in working capital requirements due to its growing business.
The company's free cash flow (FCF) generation was further depressed by its investment program of about BRL65 million during the last 12 months, a significant increase from BRL28 million in 2011. The increase in capex is mainly related to the acquisition of two slaughter and de-boning plant at the end of 2012, which is expected to increase the company's operational capacity by about 20%, when fully operational. Also, the distribution of significant volumes of dividends in 2012 impacted Rodopa's cash flow in 2012 and June 2013, LTM.
Investments are expected to be about BRL40 million during 2013, still reflecting the efforts to prepare its pants to a greater operational efficiency, mainly the recently acquired. Then, capex should remain at a maintenance level of about BRL30 million per year over the next three years. FCF generation is expected to remain negative over the next five years.
Moderately Leveraged Capital Structure; Deleverage Expected
Rodopa presents a moderately leveraged capital structure. For the LTM to June 30, 2013, the company's net debt/EBITDA ratio was 3.6x, a significant increase from the 2.1x by the end of 2012, due to the issuance of new debt issue to finance the expansion efforts. This expected peak in the company's leverage ratio is still commensurate with the current ratings, and continues to incorporate the above-average risk of the beef industry. Rodopa's net debt/EBITDA ratio should gradually decline to around 3.0x by the end of 2014, when the recent investments consolidates, but should remain at this level, as a result of its negative FCF trends.
Tight Liquidity; Challenging Refinancing Risk
Rodopa's liquidity is tight and its refinancing risk is high. As of June 30, 2013, the company had BRL400 million of consolidated adjusted debt, including BRL9 million of rental obligations. Cash and marketable securities of BRL86.4 million cover only 40% of BRL167.2 million of short-term debt as of this date. Rodopa's refinancing risk is mitigated by the fact that part of its short-term debt is related to trade finance credit lines, which are self-liquidated with its export flow.
RATING SENSITIVITIES
A downgrade may occur in the case of increased leverage over and above Fitch's expectations of a net debt/EBITDA ratio peak of 3.5x over a prolonged period. This may occur as a result of a more aggressive expansion program, deterioration in operating margins, or weaker liquidity.
The ratings may be positively affected by a sustainable improvement in Rodopa's business profile, combined with maintenance of conservative leverage, consistent improvements in liquidity, and manageable amortization schedule.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 13, 2012)
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=804830
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