SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'B-/RR4' rating to Virgolino de Oliveira Finance S/A (Virgolino Finance)'s USD 135 million proposed senior secured notes due 2020. The proposed issuance will be unconditionally guaranteed by Virgolino de Oliveira S.A. Acucar e Alcool S.A. (GVO), Agropecuaria Nossa Senhora do Carmo S.A, Acucareira Virgolino de Oliveira S.A and Agropecuaria Terras Novas S.A and will be secured by second lien on the Moncoes Mill.
Fitch has placed the proposed issuance on Rating Watch Negative, following the last rating action taken on GVO's ratings on May 28, 2014. Net proceeds from this issuance will mostly be used to prepay existing senior secured debt. Fitch currently rates GVO with the Foreign and Local Currency Issuer Default Rating (IDRs) 'B-' on Rating Watch Negative. A complete list of the ratings follows at the end of this release.
KEY RATING DRIVERS
GVO and Virgolino Finance's ratings reflect the group's leveraged capital structure and tight liquidity position. The ratings further incorporate the issues associated with the cyclicality of the sugar and ethanol commodities' price cycle, as well as the volatility of cash flow generation. It also reflects the exposure of GVO's sugarcane production business to weather conditions, foreign currency risk relative to a large portion of its debt; and the ethanol industry dynamics, which are strongly linked to Brazil's regulated gasoline prices and related government energy policies.
The ratings benefit from GVO's adequate business model and the geographical location of its production units. The ratings also incorporate positively GVO's strategic shareholding position in Copersucar and its long-term commercial partnership with this cooperative. The Rating Watch Negative reflects Fitch's concerns about GVO's high debt refinancing risks.
High Refinancing Risk:
GVO's liquidity is under pressure, to which the recent financial problems of another company in the sugar and ethanol business (Aralco) plays a role. The company has just concluded negotiations with two domestic banks to rollover its short-term debt, with the amount involved of BRL200 million deemed insufficient compared to the company's overall refinancing needs. The benefit from this expected new issuance should not be enough to trigger a positive rating action. The agency considers that at the average price levels for sugar and ethanol of the last 12 months, GVO's current operating cash generation should be insufficient to cover interest expenses and the maintenance capital expenditures, leading to the necessity of increasing debt levels in the near future.
As of Jan. 31, 2014, GVO's cash and marketable securities of BRL129 million remained tight and was covering only 0.15 time (x) its short-term debt of BRL834 million. The unencumbered own land of 4,000 hectares may give some financial flexibility to GVO as the company can use it as collateral for debt issuances.
Increased Leverage:
GVO presents a weak financial profile underpinned by its aggressive capital structure in a volatile sector. In the last 12 months (LTM) ended Jan. 31, 2014, the company's consolidated net adjusted debt/EBITDAR ratio, considering Copersucar dividends, was 6.1x, compared with 5.1x on April 2013 and 4.8x on April 2012. Excluding advances from Copersucar backed by sugar and ethanol inventories (BRL534 million), GVO's net adjusted debt/EBITDAR would be 5.0x for the same period. This high leverage results from the combination of pressured free cash flow (FCF) due to larger capital expenditures during the last harvests, which included crop expansion to increase the contribution of owned sugar cane supply.
Cash Flow Generation to Improve:
GVO's main challenge is to effectively reduce leverage through improved operational cash flow in the next two years. Positively, GVO has concluded its expansion program and as a result Fitch expects GVO to be able to enhance its FCF generation. During the LTM ended on January 2014, the company's cash flow from operations (CFFO) of BRL436 million was able to meet capital expenditures of BRL365 million, resulting in a positive FCF of BRL71 million. Net revenues have been increasing in recent years and the company's EBITDAR margin has ranged between 38% and 41%. During the LTM ended Jan. 31, 2014, net revenues were BRL1.2 billion and EBITDAR was around BRL500 million, with the EBITDAR margin of 40%. Fitch expects GVO's CFFO to increase in the coming years supported by significant scale gains and reduced idle capacity.
Relationship with Copersucar Viewed as a Positive:
GVO has an adequate business profile, based on its favorable location, diversified production base and operational flexibility. The company runs a total crushing capacity of 12 million tons. GVO enjoys competitive advantages linked to its participation in Copersucar, which allows it to maintain EBITDAR margin in line with the industry average. The company benefits from Copersucar's robust scale, which mitigates demand risks, lower logistics costs and provides better stability in the company's collection flow. Copersucar accounts for approximately 22% of crushed sugar cane in the Central South region of Brazil and for 11% and 12% of the global trade of sugar and ethanol, respectively, making it an important price making agent. Copersucar is formed by 47 mills that belong to 24 independent economic groups. Its members crushed 118 million tons of sugar cane in the 2012/2013 season.
GVO's businesses are exposed to the volatility of the sugar and ethanol prices. The company transfers 100% of its production to Copersucar through a long-term exclusivity contract. Prices for its products are linked to the average sugar and ethanol market prices plus a small premium. Copersucar remunerates GVO 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 GVO's working capital management compared to other companies that face seasonality in their activities.
Fitch contemplates in the analysis that GVO has some flexibility related to its debt with Copersucar, as the main shareholder of this cooperative. Those loans, included in the debt amount as per Fitch's criteria, typically involve lower refinancing risks than a regular bank or capital market debt. GVO can tap its credit line with Copersucar of over BRL500 million as long as it is able to crush sugar cane and deliver sugar and ethanol to the cooperative. This facility is an important liquidity source for GVO, especially in periods of more restrictive access to credit. As of Jan. 31, 2014, GVO's debt with Copersucar was BRL534 million or 17% of total adjusted debt of BRL3.1 billion. The short-term debt with this cooperative of BRL467 million represented 56% of total short-term debt.
High Exposure to FX Fluctuations:
GVO's debt profile has a relevant exposure to foreign exchange movements with 58% of debt denominated in USD at the end of January 2014. The principal amount of its foreign currency debt is not protected through derivatives, with this risk partially mitigated by the fact that the price for GVO's products is linked to the dollar. The company hedges its coupons payments. As of January 31, 2014, consolidated adjusted debt including obligations related to leased land was BRL3.1 billion. GVO's debt is comprised of two international notes issuances (47%); loans granted by Copersucar (17%); trade related transaction (15%), land lease agreements according to Fitch's methodology (12%); financings from the Brazilian Economic Social and Development Bank (BNDES, 4%); others (5%).
RATING SENSITIVITIES
The failure or delay to roll over its short-term debt in the near term should place GVO on a difficult financial situation and negatively pressure the ratings. The Rating Watch Negative may be removed should significant liquidity improvements occur.
Fitch currently rates GVO and Virgolino Finance as follows:
Virgolino de Oliveira S.A. Acucar e Alcool
--Foreign and local currency IDRs 'B-';
--Long term National Scale Rating 'BB+(bra)';
--BRL100 million Senior Unsecured debentures due 2014 'BB+ (bra)'.
Virgolino de Oliveira Finance S/A
--USD300 million Senior Unsecured Notes due 2022 'B-/RR4';
--Foreign and local currency IDRs 'B-'.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'National Scale Ratings Criteria' (Oct. 31, 2013).
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=749393
National Scale Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833682
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