Fitch Affirms Raizen's IDRs at 'BBB'; Outlook Stable

SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Raizen Combustiveis S.A. (Raizen Combustiveis)'s and Raizen Energia S.A. (Raizen Energia)'s Foreign and Local Currency Long-Term Issue Default Ratings (IDRs) at 'BBB' and the companies' National Scale Rating at 'AAA(bra)'. Fitch has also affirmed at 'BBB' the rating on the Senior Unsecured Notes due in 2017 issued by Raizen Energy Finance Limited, a fully-owned subsidiary of Raizen Energia S.A. The Outlook for the corporate ratings is stable.

KEY RATING DRIVERS

Raizen Combustiveis's and Raizen Energia's ratings are based on the combined financial strength of the two operational companies (collectively Raizen) due to their mutual financial support and cross guarantees provided under the joint venture (JV). Raizen is an important investment for both shareholders, Cosan S.A. Industria e Comercio (Cosan, rated 'BB+'/'AA(bra)' with a Stable Outlook by Fitch) and Royal Dutch Shell plc (Shell, rated 'AA' with Rating Watch Negative).

The ratings benefit from Raizen's strong financial profile, underpinned by low net leverage and sound cash position. Cash flow generation is also robust and free cash flow (FCF) should remain positive in the coming years. The increasing contribution from the less volatile downstream business is positive to the credit profile.

Strategic Importance for Shareholders

The ratings incorporate the implicit financial support received from shareholders. Raizen is the second largest downstream market for Shell globally and it is a key vehicle for Shell's growth in the renewable energy sector. Raizen also benefits from Cosan's expertise in the sugar and ethanol (S&E) business. Shareholder commitment is demonstrated by their stand-by committed line of credit in the amount of USD500 million.

Fitch views Shell's 10-year call option to be credit positive. Under the JV agreements, Shell has a call-option to acquire the remaining 50% of the JV from Cosan at the 10th and 15th anniversary since the creation of the partnership.

Increased Contribution from Downstream Activities

The downstream business has been increasing its importance over the operational margins and cash flows reported by Raizen, which reduces the cash flow volatility associated with the S&E industry. The downstream business accounted for approximately 42% of Raizen's EBITDAR and Funds from Operations (FFO) as of the last twelve months (LTM) ended March 31, 2015, favourably comparing to 32% and 22%, respectively, as of March 31, 2012. As per Fitch's forecasts, the downstream business is expected to account for over 45% of Raizen's EBITDAR over the next two years.

Raizen's ratings incorporate the representative market shares the company holds in its businesses. The company is the third largest fuel distributor in Brazil with a 19% market share in December 2014. In addition, Raizen is also the leading global sugar and ethanol producer, with an 11% share in Brazil's fragmented market, and the country's largest generator of energy from sugar cane bagasse.

Robust Operational Cash Flows

Fitch expects Raizen to continue generating strong operational cash flows over the next four years. For the fiscal 2015, Raizen's consolidated FFO and cash flow from operations (CFFO) were BRL4.8 billion and BRL4.5 billion, respectively. CFFO was sufficient to finance capex and dividends of BRL4.1 billion, which resulted in positive FCF of BRL314 million. Fitch believes Raizen has the flexibility to reduce these payments if needed to maintain a strong credit profile. Going forward, Fitch projects FCF to remain in positive territory as sugar prices recover eventually and expansion capex in the S&E business are reduced. As of March 31, 2015, net revenues and EBITDAR of BRL65 billion and BRL5.5 billion, respectively, translated into EBITDAR margin of 8.5%.

Adequate Operational Performance

Raizen Combustiveis and Raizen Energia present adequate performance for their individual businesses. Raizen Combustiveis benefits from its large scale as the third largest fuel distributor in the country, with sales volumes of 25 billion liters in fiscal 2015, 6% higher than in 2014. EBITDAR margin of 4.1% in fiscal 2015 is consistent with previous years.

Raizen Energia's EBITDAR margin of 33% in fiscal 2015 is below its peers due to a cane origination mix that favours a more balanced proportion between own and third party cane. The company presents high mechanization levels in both planting and harvesting activities and younger cane fields compared to industry average. Crushed volumes are expected to improve to 60 million tons due to more favorable weather conditions and add to the company's profitability in fiscal 2016.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Crushed volumes near 60 million tons in 2015/2016 following improved yields in the current season compared to 2014/2015.

--Product and sugar cane origination mixes relatively unchanged compared to 2014/2015.

--Capex to be significantly reduced at Raizen Energia following the end of the expansion program;

--Average sugar prices at USD13 cents/pound in 2015/2016, USD15 cents/pound in 2016/2017 and flat at USD16 cents/pound from 2017/2018 on;

--FX rate flat at BRL3/USD during the whole projected period.

--5% increase in domestic ethanol prices in 2015/2016.

--Long-term 2% CAGR in volumes expected to be reported by the company in the downstream business, except for fiscal 2016 when sales growth rate is forecasted at 1%.

--Fitch assumes that Raizen will pay as much dividends as possible without running the risk of weakening its capital structure. This means keeping net leverage below 2.0x in combination with positive FCF and excess of cash over short-term debt position.

RATING SENSITIVITIES

--Deterioration of capital structure due to excessive dividend payouts or large debt-financed acquisitions and weaker operating cash flow generation that would lead to a net leverage ratio above 2.5x on a consistent basis could trigger a downgrade. Any evidence of a decrease in business importance to Shell could also pressure Raizen's ratings.

An upgrade is unlikely in the short-term due to current excess capacity in the S&E industry, still depressed sugar and ethanol prices and uncertainties relating to fuel policies in Brazil.

LIQUIDITY

Raizen has a track record of maintaining a strong credit profile, underpinned by low leverage and robust liquidity position. As of March 31, 2015, Raizen had BRL4.0 billion of cash and market securities and BRL1.9 billion of short-term debt, yielding a 2.1x coverage ratio. This favorably compares with 1.0x coverage ratio reported for March 31, 2014, especially after a weak season for S&E business.

Raizen's total adjusted debt amounted to BRL16.3 billion as of March 31, 2015, which included inter-company loans and tax financing that should be reimbursed to both Cosan and Shell in the context of the creation of the JV in 2011. These loans are fully covered by judicial deposits and other non-current financial assets. Raizen's net adjusted debt/EBITDAR stands at 2.0x when these intra-group related debts are excluded from the calculations.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Raizen Energia

--Foreign currency Issuer Default Rating (IDR) at 'BBB';

--Local currency IDR at 'BBB';

--National scale rating at 'AAA(bra)'.

Raizen Combustiveis

--Foreign currency IDR at 'BBB';

--Local currency IDR at 'BBB';

--National scale rating at 'AAA(bra)'.

Raizen Energy Finance Limited (Raizen Energy Finance):

--Senior unsecured notes due in 2017 at 'BBB'.

The Rating Outlook 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. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

National Scale Ratings Criteria (pub. 30 Oct 2013)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987096

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987096

Endorsement Policy

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150626005791/en/

Fitch Ratings
Primary Analyst
Claudio Miori, +55-11-4504-2207
Associate Director
Fitch Ratings Brasil Ltda
Alameda Santos, 700 - 7 andar, Sao Paulo, sp CEP 01418-100
or
Secondary Analyst
Alexandre Garcia, +55-11-4504-2616
Associate Director
or
Committee Chairperson
Mauro Storino, +55-21-4503-2624
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Getty Images in talks with lenders on rescue financing - report
• Brixmor and Everview Partners to buy Slate Grocery REIT for $2.34B
• Source Agriventures files for Nasdaq IPO under ’SRAV’