Fitch Assigns First-Time IDR of 'BB-' to Ouro Verde; Outlook Stable
KEY RATING DRIVERS
Ouro Verde's ratings reflect an above-average business profile due to a reasonably predictable cash flow, which is based on long-term contracts for fleet rental of light vehicles and heavy machinery and equipment, as well as a diversified customer base. In recent years, the company has maintained low to moderate leverage. Fitch's base case scenario projects that Ouro Verde's net leverage ratio, as measured by FFO adjusted net leverage, will remain at around 2.2x in the next two years.
Key rating constraints are the very competitive environment with larger players that have more financial wherewithal and the high capital intensity of the business, which is somewhat offset by the company's flexibility to postpone capex.
Ouro Verde's main challenge is to improve its liquidity and debt profile, while managing growth in the face of a deep economic recession environment and unfavorable financing conditions in Brazil. The current bond transaction is expected to provide relief to the company's liquidity position. The inability to conclude this note issuance could lead to negative rating actions.
Improving Operating Cash Flow
Fitch believes that Ouro Verde will be able to maintain cash flow from operations (CFFO) at satisfactory levels, despite the higher financial cost. The company has been efficient at passing rising costs on to customers and has been more selective in granting new contracts in an effort to prioritize the more profitable heavy machinery and equipment leases. Between 2012 and the last 12 months(LTM) ended June 30, 2016, Ouro Verde's net revenue increased by 95%, to BRL1 billion. During the same period, the company's EBITDA grew to BRL490 million from BRL273 million while its funds from operations (FFO) rose to BRL519 billion from BRL133 million.
FFO and EBITDA margins are expected to remain stable at about 50% in the next two years. Unlike other key players in the industry, Ouro Verde is less dependent on the sale of used assets at the end of the contract due to the relatively long life of its heavy fleet and equipment rentals.
More Conservative Growth Allows Deleveraging in 2016; Capex Should Increase in 2017
Ouro Verde reported positive FCF of BRL152 million during the LTM ended June. 30, 2016 as a result of decreased capex. During this period, Ouro Verde invested BRL359 million, which compares positively with BRL454 million in 2015 and BRL778 million during 2014. Fitch expects around BRL135 million of positive FCF during 2016. Ouro Verde has the flexibility to improve FCF by reducing growth in capex, as most of its capital investments are geared toward increasing the size of its fleet/equipment and are linked to a contract. Depending upon the company's ability to access funding for growth, FCF should range from neutral to negative BRL250 million in the next two years.
Ouro Verde's leverage, as measured by FFO net adjusted leverage, was 2.3x as of LTM June 30, 2016. Fitch does not expect a material reduction in the near term, with net leverage expected to be around 2.2x in both 2016 and 2017. Ouro Verde'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 56% of its fleet value is not used as liens for loans.
-- Stable revenue growth in 2016 with a recovery from 2017 on due to stronger capex;
-- Capex at around BRL320 million in 2016 and increasing to around BRL600 million in 2017;
-- Cash balance improving to around 70% of short-term debt;
-- Dividends at 25% of net income;
-- No large-scale M&A activity.
Positive: Future developments that could lead to a positive rating action:
-- Consistent improvement in liquidity, with cash+CFFO/short-term debt above 1.7x;
-- Maintenance of solid and growing operating performance;
-- FFO adjusted net leverage consistently below 2.0x.
Negative: Future developments that may, individually or collectively, lead to a negative rating action:
-- FFO net adjusted leverage consistently above 3.5x;
-- Failure to improve liquidity compared to short-term debt, with the cash+CFFO/short-term below 1.0x, maintaining refinancing risk exposure.
-- Deterioration in used car sales in Brazil and/or in the coverage ratio fleet value-to-net value to below 1.0x.
Ouro Verde has a track record of poor liquidity. Fitch expects it to improve with the resources of the new bond issuance and cash holdings should represent around 70% of short-term debt. As of June 30, 2016, Ouro Verde reported total debt of BRL1.7 billion, of which BRL800 million was classified as short-term. This level of near-term debt compares with BRL216 million of cash and marketable securities. Up to end-2018 Ouro Verde has BRL1.7 billion of debt coming due. The ratio of short-term debt coverage, as measured by cash plus CFFO-to-short-term debt, is weak, at 0.9x. About 49% of Ouro Verde's debt is secured. The company's debt profile is mainly composed of FINAME operations and leasing (49%), banking credit lines (29%) and debentures (22%).
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
Ouro Verde Locacao e Servico S. A.
--Foreign Currency Long-Term IDR at 'BB-';
--Local Currency Long-Term IDR at 'BB-';
--Senior USD300 million unsecured notes due 2021 'BB-'.
The Rating Outlook is Stable.
Fitch currently has these additional ratings on Ouro Verde:
--National long-term rating 'A(bra)';
--Local Debentures due 2018 and 2019 'A(bra)'.
The Rating Outlook is Stable.