Fitch Affirms JSL's IDRs at 'BB'; Outlook Revised to Stable
The revision of the Outlook to Stable reflects JSL's business resilience, underpinned by the company's improving operating cash flow generation despite the recession in Brazil. Fitch's base case scenario projects that JSL's net leverage ratio, as measured by FFO Adjusted Net Leverage, will remain at approximately 2.5x in the next two years.
Given the nature of its business, Fitch believes JSL has an above-average ability versus its 'BB' rated peers to post free cash flow (FCF) generation, given its ability to postpone capital expenditures related to new vehicles. Fitch's expects JSL to continue to pursue growth in a managed way for its Movida car rental operations. As a result, FCF should remain negative by approximately BRL500 million in the next two years, also as result of its high interest burden.
KEY RATING DRIVERS
JSL's ratings reflect its strong business profile, supported by a leading position in the Brazilian logistics industry and diversified service portfolio, and its resilient operating performance over the last few years. The company's track record of maintaining an adequate liquidity position vis-a-vis its short-term obligations is a key consideration for the ratings.
Prominent Market Position and Diversified Portfolio
JSL has a leading position in the Brazilian logistics industry with a diversified portfolio of services with relevant presence in multiple sectors of the economy. The company's services include: supply chain management (33% of its net revenue), fleet and Movida car rental business (23%), vehicle dealerships (13%), passenger transportation (7%) and general cargo transportation (4%). JSL's strong market position, coupled with long-term contracts for most of its revenues (48%), minimizes its exposure to more volatile economic cycles. The company's significant operating scale has made it an important purchaser of light vehicles and trucks, giving it a significant amount of bargaining power versus other competitors in the industry.
Consistent Increase in Operating Cash Flow; High Interest Rates is a Challenge
JSL has been efficiently expanding its business profitability while maintaining solid growth. The integration of its business and cross-selling opportunities has supported gains of scale, benefiting its operating margins. Fitch expects JSL's FFO margin to remain resilient at around 23% on average in the next two years, which positively compares with an average of 19% during the 2012 - 2015 period. Between 2012 and the latest-12-month period (LTM) ended June 30, 2016, JSL's net revenue increased by 58%, to BRL6.3 billion. During the same period, the company's EBITDA grew to BRL1.1 billion from BRL430 million while its funds from operations (FFO) rose to BRL1.4 billion from BRL638 million.
JSL's business is capital intensive and still strongly dependant on high cost local financing. JSL's FFO interest coverage dropped to 2.7x in the LTM period ended in June 30 2016 from an average of 4.3x between 2012 and 2014. Fitch's base case does not foresee any relevant improvement in this coverage ratio in the medium-term, as local interest rates should remain elevated.
More Rational Capex Growth to Alleviate FCF; Used Car Sale Remains Key
During LTM June 30, 2016, JSL reported negative FCF of BRL1 billion, pressured by BRL2.5 billion of capital expenditures. Fitch expects FCF to remain negative, ranging between BRL450 million and BRL550 million in the next two years. JSL has the flexibility to improve FCF by reducing growth capex, as most of its capital investments are geared toward increasing the size of its fleet/equipment and linked to a contract. Considering only renewal capex, JSL's operating cash flow generation is sufficient to support these investments. Helping to offset these disbursements, proceeds from used car sales totalled BRL1.1 billion in the period. Excluding growth capex, JSL generated BRL239 million of positive FCF during LTM June 30, 2016.
FFO Leverage to Remain Adequate
JSL's leverage, as measured by FFO net adjusted leverage, was 2.6x as of LTM June 30, 2016. Fitch does not expect a material reduction in the near term with net leverage expected to be around 2.5x in 2016 and 2017, with a gradual decline from 2018 on. One trait of the industry is that leverage measured on an EBITDA basis is generally higher as the EBITDA does not fully reflect the cash inflow from used vehicle sales. Fitch's base case considers that JSL's net debt to EBITDA ratio will remain around 4.0x to 4.5x in the next few years. JSL's leverage relative to its fleet market value is adequate. The company reports a fleet market value of approximately BRL5.7 billion, which is slightly above its net debt position (BRL5.2 billion). However, the company's flexibility is limited, as only about 79% of its fleet is not used as liens for loans.
--Mid-single-digit revenue growth in 2016 and 2017;
--FFO margins at around 23%;
--Net Capex at around BRL650 million in the next two years;
--Cash balance remains sound compared to short-term debt;
--Dividends at 25% net income;
--No large-scale M&A activity.
Positive: Future developments that could lead to a positive rating action:
--FFO Adjusted Net Leverage below 2.0x on a sustained basis;
--FFO Margin above 27%;
--Solid and consistent operating results from its retail rent a car business (Movida);
Negative: Future developments that may, individually or collectively, lead to a negative rating action:
--FFO net adjusted leverage consistently above 3.0x;
--Deterioration of sound liquidity compared to short-term debt, leading to refinancing risk exposure.
--Deterioration in Used Car Sale in Brazil and/or in the coverage ratio fleet value-to-net value to below 1.0x;
--Large debt-funded M&A acquisition or entering into a new business in the logistics sector that adversely impacts JSL's capital structure on a sustained basis or increases its business risk exposure;
--Secured debt relative to FFO above 2.0x could lead to a downgrade of the unsecured debt.
JSL's adequate liquidity position vis-a-vis its short-term debt obligations is a key credit consideration, with cash covering short-term debt by an average 1x during the last five years. JSL has a recurring need for debt refinancing, since its debt schedule amortization is still concentrated in the next three years. Up until year-end 2018 JSL has BRL4.1 billion of debt coming due. As of June 30, 2016, JSL reported total debt of BRL6.5 billion, of which BRL1.3 billion was classified as short-term. This level of near-term debt compares with BRL1.3 billion of cash and marketable securities and BRL150 million of undrawn stand-by credit facilities due in 2018. The ratio of short-term debt coverage, as measured by cash plus CFFO-to-short-term debt, is solid, at 2.3x. About 23% of JSL's debt is secured. The company's debt profile is mainly composed of FINAME operations (22%), banking credit lines (28%), debentures (24%), and leasing operations (6%).
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
JSL S. A.
--Long-Term Foreign Currency IDR at 'BB';
--Long-Term Local currency IDR at 'BB';
--National Long-Term Rating at 'AA-(bra)';
Fitch has upgraded the following
--Local Debentures issuance upgraded to 'AA-(bra)' from 'A+(bra)'.
The upgrade for the local debentures reflects the improvement in JSL's mix of secured and unsecured debt, which has reduced the structural subordination of the unsecured debt.
The Rating Outlook has been revised to Stable from Negative.