Fitch Upgrades Tonon Bioenergia S.A's Ratings to 'CC'
KEY RATING DRIVERS
The upgrade of Tonon's IDRs to 'CC' follows the conclusion of the debt exchange offer for the USD300 million senior unsecured bonds due 2020 on July 13, 2015, but still reflects Fitch's concern about the company's ability to meet its financial obligations on time. Despite the USD70 million loan due 2019 received along with the exchange offer, which has benefited its liquidity position, Tonon continues to depend on creditors to roll over existing debt and obtain fresh money to finance future negative free cash flow (FCF). The company's operational environment remains weak due to depressed sugar and ethanol prices, which also adds additional challenges in an unfavourable macroeconomic scenario for Brazil.
Exchanged notes reached USD289 million from the total USD300 million and will enable the company to defer coupon payments for the next two years at its discretion, which can potentially save USD26 million in annual interest during this period considering all issuances in place. After two years interest payments can be deferred only if Tonon's cash position is below BRL100 million at the end of the previous quarter. Exchanged notes have a step-up coupon starting at 7.25% for the first two years, moving to 9.25% from Jan. 24, 2017 onwards.
On a pro forma basis considering the new USD70 million loan received later in the year, Fitch estimates Tonon's cash position would have increased to BRL263 million from the actual figure of BRL39 million in March 31, 2015, and cash to short-term debt coverage would have improved to 0.84x from 0.12x. On the same date, total adjusted debt/EBITDAR and net adjusted debt/EBITDAR of 6.4x and 6.3x, respectively, remained at high levels considering the volatile sugar and ethanol industry.
Fitch's key assumptions within the rating case for Tonon include:
--Improvement in crushed volumes to 8 million tons in 2015/2016 on higher yields and conclusion of investments in expansion;
--Average sugar prices at USD12 cents/pound in 2015/2016, USD13.5 cents/pound in 2016/2017 and flat at USD15 cents/pound from 2017/2018 on;
--Domestic ethanol prices keeping their historical correlation with international sugar prices.
Future developments that may, individually or collectively, lead to a negative rating action include further deterioration of Tonon's liquidity position or if the company defaults on its scheduled amortization/interest payments and/or formally files for bankruptcy protection.
Future developments that may, individually or collectively, lead to a positive rating action to the 'CCC' category include improvements in liquidity. Upgrades to higher categories are not expected in the short term given the maintenance of above-average leverage ratios and the operational and financial challenges surrounding the sugar and ethanol sector.
While it has been somewhat alleviated by the receipt of the new USD70 million loan due 2019 and the postponement of coupon payments under the USD289 million unsecured bond, Tonon's liquidity is expected to remain under pressure in upcoming seasons. The company's main challenge will be to keep rolling over its maturing obligations with new short-term debt, as long-term loans for the sugar and ethanol sector have become scarce. The company does not own land against which to borrow new medium- or long-term loans, which reduces its refinancing prospects and makes it dependent on the availability of short-term credit lines.
Tonon's FCF should remain negative in fiscal 2016, even with an estimated reduction in capital expenditures to BRL220 million after the end of the capacity expansion. A rebound of international sugar prices is taking much longer to materialize than previously projected, as weak currencies further exacerbate low prices. Domestic ethanol prices are not expected to increase materially in fiscal 2016.
FULL LIST OF RATING ACTIONS
Tonon Bioenergia S.A.
--Foreign currency IDR upgraded to 'CC' from 'RD';
--Local currency IDR upgraded to 'CC' from 'RD'.
Tonon Luxembourg S.A.
-- USD289 million senior unsecured notes, due 2020, assigned rating of 'CC/RR4';
--USD11 million senior unsecured notes, due 2020, upgraded to 'CC/RR4' from 'C/RR4'.
--USD230 million senior secured notes, due 2024, upgraded to 'CC/RR4' from 'C/RR4';