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Fitch Downgrades Coazucar to 'BB-'
September 27, 2017 / 8:00 PM / 3 months ago

Fitch Downgrades Coazucar to 'BB-'

(The following statement was released by the rating agency) NEW YORK, September 27 (Fitch) Fitch Ratings has downgraded the Long-Term Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) of Corporacion Azucarera del Peru S.A. (Coazucar) to 'BB-' from 'BB'. The senior notes were also downgraded to 'BB-' from 'BB'. The Rating Outlook is Stable. The downgrade reflects the company's weak performance and its continued reliance upon its shareholders to bolsters its weak liquidity position. Fitch expects net debt/EBITDA to increase towards 7x in FYE17 from 3.2x in FYE16. Higher leverage is the result of the expected reduction of Coazucar's EBITDA margin due to lower yields The Stable Outlook reflects our belief that the shareholder will continue to support the group and Coazucar will improve its performance and credit metrics in 2018. KEY RATING DRIVERS EBITDA Margin Contraction: After a solid performance in 2016, Fitch expects Coazucar's EBITDA margin to decline to 13% in 2017 from 26% in 2016 as a result of lower yields. Production has been impacted by the drought affecting the north of Peru and "El Nino Costero," which made harvesting difficult due to the heavy rains and flooding that followed - especially during March - that forced Coazucar's mills to stop (20 days for Casa Grande and Cartavio). Prices in the domestic market have remained solid. EBITDA is expected to decline to below PEN 250 million in 2017 from PEN494 million in 2016. Fitch expects a gradual improvement of the group's profitability in 2018 but does not expect Coazucar to recover its historical EBITDA margins of around 40%. Increased Leverage: Fitch expects Coazucar's net leverage to peak in 2017 at about 7x and then improve to below 4x in 2018. The increased leverage is due to lower EBITDA which results in negative FCF generation despite a sharp decline in capex compared to 2016, as a result of the completion of the Agrolmos project. The El Nino Costero brought too much water to Agrolmos during the first half of the year, leading the mill to stop production between February and May. The delay and the low inventory levels at the beginning of the 2Q17 forced Coazucar to import sugar this year and incur additional costs. Production at the Algromos mill, which was completed in 2017, should ramp up in 2018 and should drive the company's cash flow recovery in 2018. Support from Shareholders: Fitch factors into the ratings the financial support from Coazucar's shareholders, the Rodriguez family. Coazucar's shareholders have injected capital into the company to preserve its liquidity during the investment phase of the Agrolmos green-field project. In the first-half of the year, the shareholders injected PEN63 million in cash. Fitch expects the shareholder to continue to support the company financially during the 2H17 as a result of the deterioration of the company's cash flow. Other investments of the Rodriguez family include Gloria, the leading dairy company in Peru, and Yura, the leading cement producer in southern Peru. Currency Risk: Coazucar is exposed to currency risk, and Fitch estimates that about 72% of its debt is still mainly dollar-denominated without any hedge against local currency depreciation. Coazucar's revenue follows the trend of the dollar-denominated international prices of sugar but most of revenues and costs are mainly in local currency. Also, about 22% of revenues are in US dollars due to the group's operation in Ecuador as of FYE16. Product and Geographically Concentrated: The ratings incorporate risks associated with product concentration in sugar, which represented 89% of Coazucar's revenues in 2016. The remaining 11% is in alcohol and other by-products. The company can now easily shift production from raw to refined white sugar with the new plant. By nature, the sugar industry is volatile and exposed to fluctuations in commodity prices and external factors such as the El Nino phenomenon. Coazucar is geographically concentrated in Peru with about 71% of its revenues generated in the country; it also has operations in Ecuador and Argentina. EBITDA from Peruvian operations accounted for 86% of the total EBITDA in 2016. DERIVATION SUMMARY Coazucar's ratings reflect its dominant domestic position as the largest sugar producer in Peru, with about 50% market share. The company benefits from its proximity to owned sugarcane fields and low dependence on third-party producers. This position enables the company to price sugar in the domestic market at a high premium compared to international prices, which is not the case for other companies in the same sector rated by Fitch in Brazil. Coazucar also benefits from the strong support of its shareholder, the Rodriguez family. The rating is tempered by Coazucar's performance volatility and weak credit metrics compared to other rated companies in the sector such as Jalles Machado S.A. (B+/Stable) which operates with net debt/EBITDA below 3x. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: -Steady revenue growth; -Capex-to-sales of about 10% in 2017; -Equity injections to preserve liquidity. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Net leverage below 3.0x on a sustainable basis that improves cash flow through the investment cycle; -Tangible support from the shareholder that improves liquidity. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Deterioration of liquidity; -Net leverage above 4x in 2018; -EBITDA margin below 20%; -Lack of support from the group's shareholder; -Negative FCF. LIQUIDITY Coazucar's liquidity is weak. As of June 31, 2016, the company had PEN56 million in cash and equivalents for short-term debt of PEN159 million. 9% of total debt is short-term. Coazucar's international bond (USD243 million) is due in 2022. Fitch does, however, expect Coazucar's shareholder to continue to support the liquidity of the company.] FULL LIST OF RATING ACTIONS Fitch has downgraded the following ratings: Corporacion Azucarera del Peru S.A. --Long-term Foreign and Local Currency IDR to 'BB-' from 'BB'; --Senior unsecured debt to 'BB-'from 'BB'. The Rating Outlook is Stable Contact: Primary Analyst Johnny Da Silva Director +1-212-908-0367 33 Whitehall Street New York, NY 10004 Secondary Analyst Jose Vertiz Director +1-212-908-0641 Committee Chairperson Joe Bormann, CFA Managing Director +1-312-368-3349 Summary of Financial Statement Adjustments - No adjustments were made. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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