Fitch Assigns First-Time IDR of 'BB-' to Valid S.A.

SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings has assigned 'BB-' Foreign and Local Currency Long-Term Issuer Default Ratings (IDRs) and an 'AA-(bra)' Long-Term National Scale Rating to Valid Solucoes e Servicos de Seguranca em Meios de Pagamento e Identificacao S.A. (Valid). The Rating Outlook is Stable. At the same time, the agency has assigned a Long-Term National Scale Rating of 'AA-(bra)' to Valid's senior unsecured debentures in the amount of BRL150 million-BRL200 million, due 2019. Issuance proceeds are for short-term debt refinancing. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Valid's ratings incorporate favorable revenue and cash flow diversification in terms of geographic footprint, services and clients. It also considers the company's position as one of the largest credit card producers in Brazil and as a global supplier of SIM cards. The analysis also considers the company's track record of financial discipline supported by adequate liquidity, elongated debt maturity schedule and low leverage. Fitch expects net adjusted debt/EBITDAR to remain below 2.5x over the next three years. We have also factored in positive free cash flow (FCF) from 2017 on.

Ratings concerns are the potentially disruptive technologies, such as mobile payments and embedded SIM cards that could lead to a reduction in revenues. Temporary mismatches in terms of sales price and cost readjustments are also subject of monitoring. The moderate FX exposure and material participation of contracts with public clients in revenues were also factored into our analysis. Exposure to Brazil's adverse macroeconomic environment which has pressured consolidated results was also considered. These risks are somewhat mitigated by Valid's favorable historical operational performance, aided by long-term relationships with clients and adequate strategy for incorporating new technologies in its portfolio.

The ongoing growth in international operations as a result of the latest acquisitions is also positive for Valid's credit profile. Fitch expects the company to gradually improve its capital structure driven by expansion of operating margins and the synergy gains from the recently acquired businesses.

Diversified Service and Client Portfolio

Valid's credit profile benefits from the diverse range of services it provides and geographical diversification that partially diminishes the risks from a downturn in a specific market. The company's diverse client base is also noted as a positive. As of the LTM ended March 31, 2016, Valid's top five clients represented 20% of revenues, with the largest client contributing with only 7%.

Valid produces magnetic and chip-based credit cards and prints IDs and drivers' licenses, as well as other documents. It is also the sixth largest global producer of SIM cards for mobile devices and provides digital certification. The company has plants in seven countries serving clients in several nations, accounting for 53% of revenues generated in Brazil in first quarter 2016 (1Q16). The company's business volume is subject to macroeconomic volatility in services such as credit card production and drivers' license issuance. The SIM card manufacturing segment carries the risks associated with regulatory changes in the telecom sector.

Low Leverage to Remain

Fitch estimates Valid's net adjusted leverage to remain below 2.5x over the next three years as the company develops its operations and benefits from gains in scale and synergies. As of the LTM ended March 31, 2016, the ratios of total adjusted debt/EBITDAR and net adjusted debt/EBITDAR reached 3.0x and 2.4x, respectively. Net adjusted leverage saw only moderate growth compared to 2.2x in 2015 and 1.8x in 2014, due to pressure on margins as a result of lower volume in Brazil and non-recurring items related to capacity adjustments and severance payments.

Positive FCF from 2017 On

Fitch believes Valid will report negative FCF in 2016 and positive FCF from 2017 on supported by moderate capex and revenue expansion. The company's robust cash flow from operations (CFFO) should resume its growth trend starting in 2017, after a moderate reduction in 2016. As of the LTM ended March 2016, Valid reported CFFO of BRL175 million, pressured by lower volumes in Brazil and non-recurring items related to capacity adjustments. Nevertheless, CFFO was enough to cover capex of BRL111 million and dividends of BRL62 million, leading to FCF of BRL2 million.

Manageable FX Exposure

Fitch considers Valid's international footprint as a mitigant to FX exposure on its costs and debt. The company has supported its international expansion since 2012, which reached 53% of total revenues generated abroad during the 1Q16. At the same time, 59% of Valid's total debt and 54% of its costs and expenses were U.S.-dollar denominated. The international expansion has also helped to partially offset the macroeconomic deceleration in regions such as Brazil over the past two to three years. Fitch estimates that a 10% depreciation in the BRL would raise Valid's net leverage by 0.1x.

Disruptive Technologies Risks

Fitch sees new technologies as the main threat to Valid's current businesses. The company's favorable track record in reshaping its services to clients' demand and in incorporating new technologies through acquisitions partially mitigates this risk. Valid's business profile benefits from its proven track record of successfully acquiring and integrating a myriad of companies since 2007, which has led to business expansion, increased geographic footprint, and the addition of services-provision capacity to its portfolio.

Costs and Revenue Mismatch

Fitch sees the timing mismatch of cost and revenue readjustments as a negative aspect of Valid's important identification business segment, which represents around 50% of its EBITDA. This specific business is labor intensive, with collective-wage adjustments with unions in Brazil typically at the beginning of the year, while contracts are adjusted throughout the year. Such features could pressure EBITDAR margins particularly during times of high cost inflation. In the LTM ended March 2016, net revenues of BRL1.7 billion and EBITDAR of BRL328 million represented an EBITDAR margin of 19.1%

KEY ASSUMPTIONS

--Revenue growth of 18% in 2016 and 9% in 2017 mainly driven by the incorporation of two acquisitions (Fundamenture and MSC) in 2015;

--EBITDA margins of 15.5% in 2016 and 16.5% in 2017, pressured by the economic slowdown in Brazil and the sale of low value-added SIM cards by Fundamenture;

--No additional acquisitions;

--Dividend pay-out rates slightly above 50%.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:

--Net adjusted leverage consistently above 3x;

--Loss of important contracts, leading to a cash flow reduction and deterioration of liquidity;

--Disruptive technologies with faster-than-anticipated adoption, forcing Valid to discontinue a segment or service;

--Cash- to short-term coverage ratio sustaining below 1x.

Future developments that may, individually or collectively, lead to a positive rating action include:

--Margin improvements and expansion of hard-currency cash flows could trigger a positive rating action conditioned to a sustained conservative financial profile.

LIQUIDITY

Fitch believes Valid will maintain an adequate liquidity position over the next three years. On March 31, 2016, the company reported a cash position of BRL215 million that covered the BRL173 million short-term debt at 1.2x, which represented a moderate reduction compared to the 1.5x reported in both 2015 and 2014. The company's financial flexibility has benefited from the satisfactory debt maturity schedule that has historically kept short-term loans below 25% of total debt, evidencing company's commitment to liability management. Total adjusted debt was BRL988 million at the end of 1Q16 and incorporates off-balance-sheet debt of BRL270 million related to the opportunity cost of rental expenses.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings:

--Foreign Currency Long-Term IDR 'BB-';

--Local Currency Long-Term IDR 'BB-';

--National Long Term Rating 'AA-(bra)';

--BRL200 million unsecured debenture issuance due in June 2019 'AA-(bra)'.

The Rating Outlook for the corporate ratings is Stable.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Formhttps://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004981

Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004981

Endorsement Policyhttps://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160523006402/en/

Fitch Ratings
Primary Analyst:
Alexandre Garcia, +55 11 4504-2616
Associate Director
Fitch Ratings Brasil Ltda
Alameda Santos, 700 - 7 andar
Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst:
Gustavo Mueller, +55 21 4503-2632
Associate Director
or
Committee Chairperson:
Ricardo Carvalho, +55 21 4503-2627
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
[email protected]

Source: Fitch Ratings

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