Fitch Affirms Cosan's Ratings
OREANDA-NEWS. Fitch Ratings has affirmed Cosan S. A. Industria e Comercio's (Cosan) Long-Term (LT) Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) at 'BB+', and its National Scale rating at 'AA+(bra)'. The Rating Outlook for the FC IDR is Negative, and Stable for the LC IDR and National Scale rating. The ratings on all related debts were affirmed at 'BB+', as they are unconditionally and irrevocably guaranteed by Cosan. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Cosan's ratings are supported by its strong and diversified asset portfolio. Fitch expects this portfolio to provide a robust flow of dividends to Cosan in order to cover its interest expenses above 2x and pay a sufficient dividend to support its main shareholder's (Cosan Ltd.) debt service. The company's portfolio benefits from the resilience of activities such as distribution of natural gas, and the sale of lubricants and fuels. The share of the sugar and ethanol (S&E) business over Cosan's pro forma consolidated EBITDA remained flat at 33% in 2015, as this business presented a stable performance despite its inherent volatility.
The ratings incorporate Cosan's still-high leverage as of March 31, 2016, although some reduction has been noted, and the company benefits from a comfortable debt maturity profile. Fitch's analysis has also considered the subordination of this company's debt to the obligations of its main investments, as access to their cash is limited to dividends received.
Robust Asset Portfolio
Cosan's three main assets and source of dividends are companies with robust credit quality. Raizen Combustiveis S. A. (Raizen Combustiveis; FC and LC IDRs 'BBB', National Scale rating 'AAA(bra)') is the third largest fuel distributor in Brazil, with predictable operational cash generation. Despite its more volatile results, Raizen Energia S. A. (Raizen Energia; rated the same as Raizen Combustiveis) is the largest S&E company in Brazil and as such it benefits from its large business scale, which somewhat mitigates the current challenging scenario for the sector. Companhia de Gas de Sao Paulo (Comgas; FC IDR 'BB+', LC IDR 'BBB-', National Scale rating 'AAA(bra)') is the largest natural gas distributor in Brazil, with high growth potential and predictable operational cash flow. Fitch's Rating Outlook on all of their FC IDRs is Negative to reflect the Negative Outlook on Brazil's sovereign rating.
All of Cosan's businesses reported improved performance in 2015 compared to the previous year. In 2015, Comgas reported net revenues at BRL6.6 billion and stable EBITDA margin at 23%, while Raizen Combustiveis reported net revenues of BRL63 billion in the fiscal year ended March 31, 2016, comparing favorably to BRL56 billion in fiscal 2015. Raizen Energia reported a 22% increase in revenues to BRL11.8 billion in fiscal 2016 and flat EBITDAR margin at 29% compared to fiscal 2015. The other two assets that Cosan invests are Cosan Lubrificantes S. A. and Radar Propriedades Agricolas S. A., which add to business diversification.
High Interest Coverage Expected to Remain
Fitch expects Cosan's investees to pay robust dividend payments over the next few years, with Cosan receiving around BRL1 billion in 2016, up from BRL684 million in 2015. Raizen Combustiveis should maintain its growing trend in revenues, with a stable EBITDA margin, while Raizen Energia's operational cash flow generation should benefit from expected higher S&E prices and sales volumes. Comgas distributed BRL1.2 billion of dividends in 1Q16, which is expected to reach BRL1.4 billion at year-end. Nevertheless, Fitch estimates Comgas' annual dividends distribution will range between BRL300 million-BRL500 million from 2017 to 2019.
Cosan's interest coverage should be above 2x on a sustainable basis, which is adequate for the rating category and allows the company to gradually reduce its debt. In 2015, the ratio of dividends received/interest expense was near 2x. Cosan's access to its main investees is limited to dividends, as Raizen Combustiveis and Raizen Energia are jointly controlled by Cosan and Shell. Comgas is a regulated concession and any intercompany loan to shareholders must be approved by regulators.
High Leverage for Cosan
Cosan's leverage should remain high on a stand-alone basis, in our view, despite the lower ratio presented at the end of 1Q16. This decline was due to appreciation in the BRL and, more important, a robust dividend inflow of BRL730 million in the three-month period ended March 31, 2016. The company reported net adjusted debt of BRL5.9 billion and total dividend inflow of BRL1.4 billion in the last 12 months ended March 31, 2016, bringing down the ratio of net adjusted debt-to-EBITDA plus dividends received to 4.9x. This compares favorably with the net adjusted debt of BRL7.6 billion and net adjusted leverage of 12.1x reported in December 2015.
Debt consisted mostly of intercompany loans of BRL4.4 billion, which represent past bond issuances by its fully owned subsidiaries, and non-voting preferred shares of BRL2 billion. Although issued by Cosan Luxembourg S. A. (Cosan Luxembourg) and Cosan Overseas Ltd. (Cosan Overseas), the associated debt at both entities is guaranteed by Cosan, which is ultimately responsible for the payment.
Fitch's key assumptions within our rating case for Cosan include:
--An increased flow of dividends coming from Comgas, Raizen Combustiveis and Raizen Energia over the next two years, reaching over BRL1 billion per year.
--Potential new issuances will only be used to refinance existing debt.
Future developments that may, individually or collectively, lead to a negative rating action include deterioration of the credit profiles of Raizen Combustiveis, Raizen Energia and/or Comgas, and Cosan's interest coverage by dividends received falling below 2x on a sustainable basis. A downgrade of the sovereign rating may also trigger a downgrade of Cosan's FC IDR and ratings for the associated bond issuances.
Future developments that may, individually or collectively, lead to a positive rating action include more predictable cash flow generation at Raizen Energia, and Cosan's interest coverage by dividends received remaining above 3x on a sustainable basis.
Cosan's debt maturity profile is well laddered and is not expected to pressure the company's cash flows until 2018 when the BRL850 million notes are due. Part of the proceeds from the 2027 senior unsecured notes recently issued by Cosan Luxembourg is estimated to be used to prepay 60% of the 2018 notes and reduce liquidity pressures in that year. As of March 31, 2016, the holding company had BRL980 million of cash versus short-term debt of BRL535 million, yielding robust cash-to-short-term debt coverage of 1.8x. Fitch expects Cosan to receive a robust inflow of dividends that should provide adequate repayment capacity for upcoming interest. Cosan's liquidity is reinforced by a fully available committed Stand-by Facility of BRL750 million and the positive dividend track record.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Cosan S. A Industria e Comercio:
--Long-Term Foreign Currency IDR at 'BB+'; Outlook Negative
--Long-Term Local Currency IDR at 'BB+'; Outlook Stable
--National scale rating at 'AA+(bra)'; Outlook Stable
Cosan Overseas Limited:
--Perpetual notes at 'BB+'.
Cosan Luxembourg S. A.:
--Senior unsecured notes due in 2018, 2023 and 2027 at 'BB+'.