Fitch Affirms Cosan Limited's IDRs at 'BB'; Outlook Stable
KEY RATING DRIVERS
Cosan Limited's ratings reflect the sound business model of its main asset, Cosan S.A Industria e Comercio (Cosan; Fitch foreign and local currency IDRs of 'BB+' and long-term National Scale rating of 'AA(bra)'), which accounts for 80% and 75% of Cosan Limited's consolidated revenues and EBITDA, respectively, and 70% of dividends received in the last 12 months (LTM) ended June 30, 2015. Cosan Limited's business profile is supported by a diversified asset portfolio and predictable cash flow that partly softens the inherent volatilities of the sugar and ethanol industry. The one-notch difference compared to Cosan's ratings incorporates the holding company nature and inherent structural subordination of Cosan Limited's debt and the links between the company's operating cash flows to dividends received from Cosan.
The ratings are constrained by Cosan Limited's current stake in Cosan Logistica S.A (Cosan Logistica), which owns Rumo Logistica Operadora Multimodal S.A. (Rumo). The merger of Rumo with America Latina Logistica S.A. (ALL; 'BB-', Outlook Stable) during the first quarter 2015 had a negative impact on Cosan Limited's consolidated financials and is expected to slow down the potential deleveraging process of the Cosan group. While the logistics segment is not expected to pay dividends over the next four years, Fitch expects the remaining businesses to provide a growing and robust flow of dividends to Cosan Limited in order to pay sufficient dividends to its shareholders. The ratings also incorporate Cosan Limited's low leverage and satisfactory liquidity on a standalone basis.
Holding Company nature
Cosan Limited is a non-operating holding company that holds a 62% interest in Cosan, the holding company that is engaged in sugar, ethanol and energy production, and distribution of natural gas, lubricants and fuel. Cosan Limited also holds a 62% interest in Cosan Logistica. The main components of Cosan Limited's cash flows are the dividends received from Cosan and the dividends paid out to its shareholders.
Robust Asset Portfolio
Cosan Limited's three main assets and source of dividends in the energy segment are all rated as investment grade. Raizen Combustiveis S.A. (Raizen Combustiveis; rated 'BBB'/'AAA(bra)', Outlook Stable) 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 'BBB'/'AAA(bra)', Outlook Stable) is the largest sugar and ethanol company in Brazil and as such it benefits from its large business scale, which somewhat mitigates the currently challenging scenario for the sector. Companhia de Gas de Sao Paulo (Comgas; rated 'BBB-'/'AA+(bra)', Outlook Stable) is the largest natural gas distributor in Brazil, with high growth potential and predictable operational cash flow.
All these businesses reported improved performance in 2014 compared to the previous year. In 2014, Comgas reported net revenues at BRL6.4 billion and stable EBITDA margin at 22.5%, while Raizen Combustiveis reported net revenues of BRL56 billion, comparing favorably to BRL51 billion in the fiscal year ended March 31, 2014. Raizen Energia reported stable revenues and operating margins of BRL9.2 billion and 28%, respectively, in 2014. The other two assets invested in by Cosan are Cosan Lubrificantes S.A. and Radar Propriedades Agricolas S.A, which add to business diversification.
Cosan Limited's increasing exposure to the logistics segment that followed the merger of Rumo with ALL has enhanced its business model due to the inherent operating cash flow stability and high growth potential of this industry in Brazil. The merger is expected to contribute to broader business diversification and help the group to further lessen the cash flow volatility derived from the sugar and ethanol business. Fitch forecasts the logistics business will generate an average EBITDA margin of 44% over the next four years, comparing favorably to Cosan Limited's 30% historical average since March 31, 2013. Fitch does not expect the logistics segment to pay dividends over the next four years due to the massive capex necessary to improve ALL's operations.
Low Leverage at Holding Level
Cosan Limited posted low leverage on a standalone basis as of June 30, 2015. At the holding company level, Cosan Limited's leverage measured as net debt-to-EBITDA plus dividends received was 0.98x as per Fitch's calculations, comparing favorably to 1.24x as of Dec. 31, 2014.
The one-notch difference versus the ratings assigned to Cosan is due to the holding company nature and inherent structural subordination of Cosan Limited's debt and the links between the company's operating cash flows to dividends received from Cosan. The rating is also constrained by the possibility of new debt being issued by Cosan Limited to finance new acquisitions under the group's aggressive expansion plan.
Cosan Limited's leverage was high on a consolidated basis due to the merger and consolidation of ALL's financials into Cosan Limited's. On a consolidated basis, the net adjusted debt-to-EBITDAR was high at 6.8x when dividends received from non-consolidated subsidiaries are factored into EBITDAR figures. On a pro forma basis that assumes 12 months of operations for ALL, consolidated net adjusted debt-to-EBITDAR was still high, but lower at 6.2x as per Fitch's calculations. Fitch expects the merger between Rumo and ALL to slow down the deleveraging process of the group, and for Cosan Limited's consolidated net debt-to-EBITDAR plus dividends received to stay above 5x over the next three years.
-- As a majority shareholder of Cosan, Cosan Limited is expected to benefit from an increased flow of dividends coming from Comgas, Raizen Combustiveis and Raizen Energia S.A over the next two years, reaching around BRL1 billion per year.
-- Fitch does not expect Cosan Logistica or any of its subsidiaries to pay dividends over the next four years given the massive capex program to be carried out by ALL.
-- In the short term, potential new issuances at Cosan Limited will only be used to refinance existing debt. For the medium term, Fitch incorporates the possibility of Cosan Limited taking on new debt to finance the group's aggressive expansion plan and acquisitions.
-- Cosan Limited's financial flexibility relative to its access to the debt and capital markets, in combination with dividends received from Cosan, ensures strong refinancing capacity. Fitch believes Cosan Limited has the flexibility to reduce the payouts to its shareholders if necessary.
Future developments that may, individually or collectively, lead to a negative rating action include the deterioration of the credit profile of either Cosan or Cosan Logistica. Fitch will be monitoring the pace at which the potential sizeable capex program at ALL is concluded and a downgrade could occur if Cosan Limited fails to deleverage on a consolidated basis in the medium term.
An upgrade is unlikely in the short- to medium-term as the group's growth strategy in the logistics segment should continue to make a relevant deleveraging process difficult.
Cosan Limited posted healthy debt coverage ratios on a standalone basis as of June 30 2015. The company's cash plus dividends received covered its short-term debt by 3x as of June 30 2015. Cosan Limited posted a cash position of BRL3 million and total debt of BRL378 million, of which short-term debt was BRL103 million. Dividends received amounted to BRL300 million in the LTM ended June 30 2015.
Cosan Limited's total debt consisted of bank debt taken on to finance the acquisition of Cosan shares. The group's strong financial flexibility relative to its access to the debt and capital markets, in combination with dividends received from Comgas and Raizen, ensures strong refinancing capacity for Cosan Limited. While the dividends received from Cosan have recently fallen short of the dividends paid to its shareholders, Fitch believes Cosan Limited has the flexibility to reduce the payouts to its shareholders if necessary.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
--Foreign and local currency IDRs at 'BB';
The Rating Outlook is Stable.