Fitch Downgrades USJ's IDRs to 'C'

SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings has downgraded the Foreign and Local Currency long-term Issuer Default Ratings (IDRs) of U.S.J. - Acucar e Alcool S.A. (USJ) to 'C' from 'CC' and the long-term National Scale rating to 'C(bra)' from 'CC(bra)'. Fitch has also downgraded the company's USD275 million senior unsecured notes due 2019 to 'C/RR4' from 'CC/RR4'.

KEY RATING DRIVERS

The downgrade reflects USJ's announcement, on March 15 2016, of a private exchange offer for any and all of its outstanding 9.875% senior unsecured notes due 2019 for newly issued secured notes at 65% or 60% of the par value and unchanged tenor. According to the terms and conditions of the new notes, the company will have the option to defer coupon payments in 2016 and 2017 and pay accrued interest at maturity in 2019. According to Fitch's methodology, this exchange proposal is viewed as a distressed debt exchange (DDE).

In case USJ defers coupon payments in 2016 and 2017, the coupon rate will increase to 12% for these two years, and return to the original 9.875% in 2018 and 2019. New notes will be secured by a fiduciary lien on USJ's Araras mill. Bondholders who accept the offer by March 28, 2016 will be subject to a 35% haircut. Acceptance by April 11, 2016 will lead to a 40% haircut. USJ also requests consent to eliminate all restrictive covenants, certain events of default, and related provisions under the existing notes Indenture.

The conclusion of the debt exchange offer and consent solicitation is conditioned upon the valid tender of at least 90% of the aggregate principal amount of the outstanding existing notes.

KEY ASSUMPTIONS

--Crushed sugar cane volumes of 3.2 million tons in 2015/2016 and gradual increases of 5% thereafter;

--Mix relatively unchanged at 66% sugar and 34% ethanol for the projected period;

--Average sugar prices at USD13 cents/pound in 2015/2016, USD15 cents/pound in 2016/2017 and USD16 cents/pound onward;

--Domestic ethanol prices keep their historical correlation with international sugar prices;

--No dividends coming from SJC Bioenergia (SJC)in 2015/2016;

--Up to BRL60 million in land sales in the State of Goias have been forecast for 2015/2016.

RATING SENSITIVITIES

According to Fitch's criteria for DDEs, the company's IDRs and National Scale rating will be downgraded to Restrict Default ('RD') and 'RD(bra)', respectively, once the exchange offer is approved or if the company defaults on its scheduled amortization/interest payments.

After the IDR is placed at 'RD', an upgrade to the 'CC' or 'CCC' category is possible, as a consequence of improvements in the company's liquidity position.

LIQUIDITY

Fitch forecasts negative free cash flow (FCF) at BRL41 million for fiscal 2016 and FCF turning positive only in fiscal 2017. The company posted cash flow from operations (CFFO) of BRL161 million, which covered capital expenditures of BRL137 million and left FCF at positive BRL23 million in the last 12 months ended Dec. 31 2015. At the end of 2015, the company reported a weak cash position of BRL52 million, unfavorably compared to short-term debt of BRL333 million.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following:

--Foreign and local currency long-term IDRs to 'C' from 'CC';

--Long-term National Scale rating to 'C(bra)' from 'CC(bra)';

--USD275 million senior unsecured notes due 2019 to 'C/RR4' from 'CC/RR4'.

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 Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001103

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001103

Endorsement Policy

https://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/20160317006163/en/

Fitch Ratings
Primary Analyst
Claudio Miori
Associate Director
+55 11 4504-2207
Fitch Ratings Brasil Ltda
Alameda Santos, 700 - 7 andar, Sao Paulo, SP - CEP 01418-100
or
Secondary Analyst
Alexandre Garcia
Associate Director
+55 11 4504-2616
or
Committee Chairperson
Ricardo Carvalho
Senior Director
+55 21 4503-2627
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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