Fitch Upgrades USJ's IDRs to 'CCC'

SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings has upgraded U.S.J. - Acucar e Alcool S.A's (USJ) foreign and local currency Long-Term Issuer Default Ratings (IDRs) to 'CCC' from 'RD' and its National Scale rating to 'CCC(bra)' from 'RD(bra)'. At the same time, Fitch has assigned a 'CCC+/RR3' rating to the new USD197 million secured notes due 2021, and affirmed the rating on the remaining USD29 million senior unsecured notes due 2019 at 'CCC' with revision to 'RR4' from 'RR2'.

KEY RATING DRIVERS

The upgrade of USJ's IDRs to 'CCC' follows the conclusion on May 17, 2016 of the debt exchange offer for the USD275 million senior unsecured bonds due 2019 with approximately 90% of the noteholders participating in the exchange. According to the terms of the new notes, the company will have the option to defer coupon payments in 2016 and 2017 and pay accrued interest at maturity, which has been extended to 2021 from 2019.

The upgrade also reflects Fitch's expectation for the company to achieve neutral-to-positive free cash flow (FCF) in the next two years given the positive pricing environment for sugar and ethanol, and the deferral of coupon payments in 2016 and 2017. Nevertheless, 'CCC' rating still reflects Fitch's concern on the company's ability to meet its financial obligations given the still challenging refinancing prospects for Brazilian Sugar and Ethanol (S&E) companies.

Fitch expects the deferral of coupon payments for the exchanged notes, which amounted to USD197 million, to save USJ approximately USD25 million in annual interest payments. If 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 the following years. The RR3 Recovery Rating of the new notes reflect good recovery prospects as it is secured by USJ's Araras mill, land properties and sugar cane.

On a pro forma basis Fitch expects USJ's cash position to amount to BRL70 million and short-term debt to reach BRL 280 million as of FY2016, with FCF still in negative territory and net leverage at 5.5x. While Fitch does not expect material improvements in the cash-to-short-term debt coverage, the company is forecast to generate neutral to positive FCF and improve its net leverage within the 4.5 - 5.0x range in FY2017.

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 around BRL1,400/ton in 2016/2017 and beyond;

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

--No dividends coming from SJC Bioenergia (SJC) in 2016/2017.

RATING SENSITIVITIES

The company's ratings could be downgraded if liquidity deteriorates further and/or the expected positive FCF for FY2017 does not materialize. Ratings will be downgraded to 'D' and D(bra) if the company formally files for bankruptcy protection.

The rating on the USD29 million senior unsecured notes due 2019 could be downgraded should the company's secured debt proportion increase in coming months, resulting in deterioration in recovery prospects. The notes' current RR4 Recovery Rating reflects average recovery prospects given default.

An upgrade to higher categories is unlikely over the short-term given USJ's persistently high refinancing risks.

FULL LIST OF RATING ACTIONS

U.S.J. - Acucar e Alcool S.A:

--Foreign and local currency Long-Term IDRs upgraded to 'CCC' from 'RD';

--Long-Term National Scale rating upgraded to 'CCC(bra)' from 'RD(bra)';

--USD197 million senior secured notes, due 2021, assigned rating of 'CCC+/RR3';

--USD29 million senior unsecured notes due 2019 affirmed at 'CCC', revised to 'RR4' from 'RR2'.

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=1005284

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005284

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/20160527005843/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
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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