OREANDA-NEWS. Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) for America Latina Logistica S.A. (ALL) at 'BB-' and its National Scale long-term rating at 'A(bra)'. Fitch has also affirmed the ratings for ALL's subsidiaries and their respective unsecured debentures at 'A(bra)'. The Rating Outlook has been revised to Negative from Stable for all corporate ratings. A full list of the rating actions follows at the end of this release.

ALL's ratings are based on the consolidated credit profile of Rumo Logistica Operadora Multimodal S.A. (Rumo), after it acquired ALL, in March 2015. As of June 2015 latest-12-months (LTM), ALL represented about 75% of Rumo's proforma consolidated EBITDA.

ALL's Rating Outlook revision follows the challenges that Rumo will face to improve its currently aggressive capital structure and finance the huge capex plan amid Brazil's weak macroeconomic environment. Rumo will be challenged to consistently capture increasing volumes and improve operating profitability in order to increase its operational cash flow and delever its consolidated balance sheet. Fitch expects the company to post a net adjusted debt-to-EBITDAR ratio, according to Fitch's methodology, in the 6.3x - 6.5x range during the 2015 and 2016 due to the additional debt taken on to finance the capex plan. Fitch expects a decline to below 6.0x from 2017 onwards, when the company is expected to fully benefit from capacity increase and operating margins expansion.

Fitch continues to see ALL's merger with Rumo as credit positive for now. ALL became part of the Cosan Group (Cosan Limited, Foreign Currency and Long-term Currency IDR 'BB'; Stable Outlook). As part of the Cosan Group, the company's financial flexibility significantly improved and the combined operations will also allow Rumo and ALL to benefit from synergies between the two companies' logistics business models. Fitch believes that a more efficient cost structure is expected to follow from the combination of the two businesses. This will partly offset the short to medium term cash flow impact caused by the company's massive capex program. ALL's ratings also reflect the company's predictable cash flow generation through the economic cycle as well as its solid business position as a railroad and logistic operator in the Brazilian infrastructure industry.


High Leverage; Slight Decline is Expected

ALL's leverage is high for the rating category. Fitch expects a gradual decline just after 2017, due to the aggressive capex program to be carried out in the next three years, mainly financed by debt. The company's deleverage will depend on Rumo's abilities to increase volumes and profitability. On a pro forma basis, considering the LTM ended June 30, 2015, the combined entity's net adjusted debt-to-EBITDAR ratio, according to Fitch's methodology, peaked at 7.6x. This figure compares unfavourably to 6.6x in 2014 and 4.3x in 2013 and was negatively impacted by ALL's difficulties over the last two quarters to pass large cost increases onto prices. Rumo's ability to start its deleveraging process as of 2017 when the greatest part of the medium-term capex program is expected to be finished is crucial for the maintenance of the rating at the 'BB-' category.

Future FCF Trends Negative

Despite the positive trend in Rumo's funds from operations (FFO) going forward, the expected substantial capex plan will add pressure to its cash flow and prevent the company from generating positive free cash flow (FCF). Rumo is expected to invest about BRL7.4 billion up to 2019, which should result in volume increases of 8% - 10% per year, during the period. According to Fitch's projections, Rumo's consolidated free cash flow is not expected to turn positive before 2018.

Solid Business Position

The ratings incorporate ALL's solid business position as the sole railroad transportation operator in the South and Mid-Western regions of Brazil, areas with high growth potential due to stable global demand for grains. Although ALL faced some operating challenges during 2014 and 2015, the long-term fundamentals of its businesses remain strong. The company's operating model has demonstrated resilience against adverse global economic conditions through several cycles. The company has shown an ability to increase cargo volumes in the last years during diverse economic scenarios. Fitch understands that the merger with Rumo's operation will strengthen the consolidated business profile as it will combine important operational logistics assets and new business opportunities with Cosan Group's rail operation.


Fitch's key assumptions within its rating case for the issuer include:

--Mid-single digit revenues growth from 2015 to 2018;
--EBITDA margin of about 41% in 2015; gradual increase to 49% in 2017 considering synergies and scale gains;
--Capex of BRL2.8 billion during the second half 2015 and 2016; and BRL4.6 billion from 2017 to 2019;
--Adjusted net debt to EBITDAR, according to Fitch' calculation, at the range of 6.0x-6.5x in 2015 and 2016 and below 6.0x from 2017 onwards.


Future developments that may, individually or collectively, lead to a positive rating action include:

--Rating upgrades are unlikely in the medium term due to the challenges Rumo faces to improve is capital structure while financing its capex plan.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Inability to improve operational cash flow generation through increasing volumes of at least 8% per year and EBITDA margin expansion up to 2017;
--Failure to roll over short-term debt and finance the huge capex in the medium term at competitive credit lines.


Fitch expects Rumo to report more conservative short-term debt coverage ratios from 2016 onwards. On June 30, 2015, Rumo's consolidated cash and marketable securities where approximately BRL1.0 billion. This compares unfavourably to BRL1.7 billion of debt due during the next 12 months. Fitch believes Rumo will be able to properly raise medium to long-term debt during the next 12 months, which will soften current refinancing risks. The ratings incorporate Fitch's assumption that Rumo will achieve healthier cash to short-term debt ratios during the investment period. ALL's good track record of access to credit lines at Banco Nacional de Desenvolvimento Economico e Social, BNDES, supports Fitch's expectation that the company will be able to finance great part of the current capex plan with adequate funding.


Fitch affirms the following:

--Long-term foreign and Local currency IDRs at 'BB-';
--Long-term national rating at 'A(bra)';
--Long-term national rating of the 10th debenture issue at 'A(bra)'.

ALL Malha Sul S.A.
--Long-term national scale rating at 'A(bra)';
--Long-term national rating of the 3rd debenture issue at 'A(bra)'.

ALL Malha Norte S.A.:
--Long-term national scale rating at 'A(bra)';
--Long-term national rating of the 6th debenture issue at 'A(bra)';
--Long-term national rating of the 8th debenture issue at 'A(bra)'.

ALL Malha Paulista S.A.
--Long-term national scale rating at 'A(bra)';
--Long-term national rating of the 1st debenture issue at 'A(bra)'.

The Rating Outlook for the corporate ratings has been revised to Negative from Stable.