SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has affirmed at 'B' the Foreign and Local Currency Issuer Default Ratings (IDRs) of Virgolino de Oliveira S/A Acucar e Alcool (GVO) and Virgolino de Oliveira Finance S/A (Virgolino Finance). The Rating Outlook is Stable. A full list of GVO's 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 group's exposure to the cyclicality of the sugar and ethanol commodities' price cycle, as well as the volatility of cash flow generation, exposing the group to refinancing risk. It also reflects the exposure of GVO's sugarcane production business to volatile 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 reflect positively GVO's strategic shareholding position in Copersucar and its long-term commercial partnership with this cooperative.
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 free cash flow generation (FCF) and to gradually decrease its leverage ratios. Fitch expects net leverage ratios to be around 5.1x in 2014 and 4.1 in 2015, an improvement compared to 5.1x in FY13. The ratings should be under pressure in case the expected deleveraging does not materialize.
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
EBITDA margin above 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.
GVO also benefits from less restrictive access to liquidity during
challenging operating scenarios when compared to other peers in the
agribusiness, due to the credit lines provided by Copersucar.
Copersucar's large scale business 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 in the 2012/2013 season.
High Leverage:
In the LTM ended Oct. 31, 2013, GVO's consolidated
net adjusted debt/EBITDAR ratio, considering Copersucar dividends, was
6.0 times. Excluding advances from Copersucar backed by sugar and
ethanol inventories (BRL517 million), GVO's net adjusted debt/EBITDAR
would be 4.9x for the same period. This higher leverage resulted from
the combination of pressured FCF due to larger capital expenditures
during the last harvests, which included crop expansion to increase the
contribution of owned sugar cane supply and the negative impact of the
FX variation on GVO's debt. The impact of recent years' FX fluctuations
on the bond notes alone has added BRL300 million to GVO's gross debt
figure as of Oct. 31, 2013.
Additionally, the October 2013 figures reflect the middle of the crop period, when working capital needs are higher compared to the end of the harvest. Positively, the recent investments in agricultural activities have borne fruits already and the scale gains explain part of the upward trend in Free Cash Flow (FCF) seen in the FY13 and on Oct. 31, 2013. During the LTM, the company's CFFO of BRL412 million was able to meet capital expenditures of BRL395 million, resulting in a positive FCF of BRL17 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 Sept. 30, 2013, net revenues were BRL1.3 billion and EBITDAR was BRL495. Fitch expects GVO's Cash from Operations (CFFO) to increase in the coming years supported by significant scale gains and reduced idle capacity. Fitch also expects leverage to follow suit so that leverage declines to levels more appropriate for the rating category.
GOV Links to Copersucar:
GVO transfers 100% of its production to
Copersucar through a long-term exclusivity contract, mitigating demand
risk. Prices for its products are linked to the average sugar and
ethanol market prices plus a small premium.. GVO 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 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. GVO'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.
Tight Liquidity Heightens Credit Risk:
As of Oct. 31 2013, GVO's
cash position of BRL104 million accounted for only 13% of the company's
short-term debt. The ratio would be 30% if the advances from Copersucar
are excluded from the calculations. As of Oct. 31 2013, GVO's cash plus
cash from operations (CFO) to short-term debt ratio was 0.7 times (x),
times or 1.5x when the advances from Copersucar are not factored into
the calculations. This weak liquidity is partially mitigated by the
credit line made available by Copersucar. Copersucar provides to GVO a
significant working capital financing line that is equivalent to 80% of
GVO's inventories and limited to a maximum of 40% of the company's
revenues. This line, which is equivalent to approximately BRL500
million, enhances financial flexibility and is linked to guarantees on
inventories and/or bank guarantees. This facility is an important
liquidity source for GVO, especially in periods of more restrictive
access to credit.
High Exposure to FX Fluctuations:
GVO's debt profile has a relevant
exposure to foreign exchange movements with 69% of debt denominated in
USD. The coupons the company will pay next year relating to the two
international notes are already hedged. Although the principal amount of
debt is not protected through derivatives, the currency exposure is
partially mitigated by the fact that the price for GVO's products is
linked to the dollar. As of Oct. 31, 2013, consolidated adjusted debt
including obligations related to leased land was BRL3 billion. GVO's
debt is comprised of two international notes issuances (51%); loans
granted by Copersucar (20%); financings from the Brazilian Economic
Social and Development Bank (BNDES, 9%); export prepayment transactions
(18%) and others (2%).
Rating Sensitivities
Negative rating actions could be driven by GVO's failure to deleverage and/or lower than expected operational cash flow generation and deterioration of its operating margins. Improvement in the group's liquidity position coupled with a longer and more manageable debt maturity profile with lower leverage levels, could lead to a positive rating action
Fitch affirms GVO and Virgolino Finance's ratings as follows:
GVO:
--Long-term national scale corporate rating at 'BBB(bra)';
--1st
debenture issuance due 2014 at 'BBB(bra);
--Foreign and local
currency IDR at 'B'.
Virgolino Finance:
--Foreign and local currency IDR at 'B';
--Senior
unsecured notes at 'B/RR4'.
The Rating Outlook is Stable.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating
Methodology' (Aug.5, 2013);
--'National Ratings - Methodology
Update' (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=715139
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=812579
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