September 13, 2017 / 2:27 PM / a year ago

Fitch Rates Cosan Limited's Proposed Global Notes Issuance 'BB(EXP)'

(The following statement was released by the rating agency) SAO PAULO, September 13 (Fitch) Fitch Ratings has assigned a 'BB(EXP)' rating to Cosan Limited's (Cosan Limited) proposed senior unsecured global notes issuance of USD 500 million due 2024. The company will use the proceeds to repay existing indebtedness of USD230 million and to inject up to USD270 million into its subsidiary Cosan Logistica S.A's (Cosan Logistica) capital. Fitch's current Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) for Cosan Limited are 'BB' with a Stable Rating Outlook. KEY RATING DRIVERS Cosan Limited's ratings reflect its low leverage and robust liquidity position on a standalone basis, as well as the expected comfortable debt service coverage through the dividends coming from its main subsidiary, Cosan S.A Industria e Comercio (Cosan; Foreign and Local Currency IDRs BB+ and Long-Term National Scale Rating AA+(bra)). Cosan and its subsidiaries accounted for around 90% of Cosan Limited's consolidated pro forma revenues, 75% of pro forma EBITDA and 100% of dividends received in the latest-12-months (LTM) ended June 30 2017. The one-notch difference compared to Cosan's ratings continues to incorporate the holding company nature and inherent structural subordination of Cosan Limited's debt to dividends received from Cosan. Cosan Limited's credit profile is also supported by a diversified asset portfolio. The company's investments include operations in energy generation from biomass, distribution of natural gas, fuel and lubricants. These businesses enjoy predictable cash flow that partly softens the inherent volatilities of its sugar and ethanol business. The company also operates in the logistic industry, which is not expected to distribute dividends over the next four years though it presents strong growth potential. Robust Asset Portfolio Cosan Limited is a non-operating holding company that carries a robust and diversified asset portfolio that reduces sector concentration risks. The company 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. Its three main assets and source of dividends are companies with robust credit quality. Raizen Combustiveis S.A. (Raizen Combustiveis; Foreign and Local Currency IDRs BBB, National Scale Rating AAA(bra)) is the second largest fuel distributor in Brazil, with predictable operational cash generation. Despite its more volatile results, Raizen Energia S.A. (Raizen Energia; rated the same as Raizen Combustiveis) is the largest sugar and ethanol company in Brazil and as such it benefits from business scale, which somewhat mitigates the frequent challenging scenario for the sector. Companhia de Gas de Sao Paulo (Comgas; Foreign Currency IDR BB+, Local Currency IDR BBB-, National Scale Rating AAA(bra)) is the largest natural gas distributor in Brazil, with high growth potential and robust financial profile. The other asset that Cosan invests in is Cosan Lubrificantes S.A., which adds to business diversification. All of Cosan's businesses managed to report strong credit profiles in LTM ended June 2017, despite the challenging macroeconomic scenario in Brazil. During the LTM ended June 2017, Comgas's normalized EBITDA was BRL1.6 billion, which positively compares with BRL1.4 billion reported in 2015. In the same period, Raizen Combustiveis and Raizen Energia reported consolidated revenues and EBITDAR of BRL80 billion and BRL6.3 billion, respectively, 7% and 9% higher than previous year. Cosan Limited also holds 72% interest in Cosan Logistica, which owns 28% of Rumo (Foreign and Local Currency IDRs BB-, National Scale Rating A(bra)). While still highly levered, Fitch expects Rumo to embark on a fast deleverage trend following the company's ongoing gains of scale, improving operating profitability and the planned capital injection. Fitch does not expect Rumo to pay dividends over the next four years due to the massive capex necessary to improve operations. The presence of Rumo contributes to broader business diversification and helps the group to further lessen the cash flow volatility derived from the sugar and ethanol business. Still Low Leverage at Holding Level Fitch forecasts a pro forma leverage ratio of net debt-to-dividends received at 2x for Cosan Limited assuming the bonds issuance will amount to USD500 million. As of June 30 2017, this ratio was 0.6x as per Fitch's calculations, in line with 0.8x as of Dec. 31, 2016. The one-notch difference from Cosan's incorporates the structural subordination of Cosan Limited's debt. Its main dividends provider, Cosan, receives dividends from Raizen Energia, Raizen Combustiveis and Comgas and must serve or manage its own debt before paying dividends to its shareholders. On a consolidated basis, Cosan Limited's leverage is also adequate for the rating category even with the consolidation of Rumo. The net adjusted debt-to-EBITDAR was at 2.8x when dividends received from non-consolidated subsidiaries are factored into EBITDAR figures. Fitch expects the logistics division to slow down the deleveraging process of the group, and for Cosan Limited's consolidated net debt-to-EBITDAR plus dividends received to stay at current levels in 2017 and 2018. DERIVATION SUMMARY Cosan Limited's business portfolio compares similarly with Votorantim S.A's (VSA, IDR BBB-/Negative) in terms of industry diversification, though VSA's subsidiaries hold a clearer competitive global position due to strong market positions and cost structures that are among the lowest in their respective industries. VSA's portfolio of assets includes subsidiaries operating in cement, zinc & by-products, orange juice and pulp (29.4% stake in Fibria S.A.). VSA's cement business remains a drag on credit quality for the Group due to a weak Brazilian economy, but its liquidity is stronger than Cosan Limited's and a key ratings consideration. VSA's cash on hand of BRL10.2 billion reported for Dec. 31, 2016 was sufficient to support debt amortization up to mid-2021. KEY ASSUMPTIONS --Increased flow of dividends coming from Comgas, Raizen Combustiveis and Raizen Energia to Cosan, over the next two years, reaching around BRL1.5 billion per year. --Cosan Logistica not to pay meaningful dividends over the next four years. --No additional investments coming from Cosan Limited. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to a negative rating action include: --Expectation of debt service coverage ratio at Cosan Limited level below 0.5x when the debt matures in 2018, based on reduced dividends to be received and no success in the proposed Global Notes issuance; --Cosan Limited entrance in new investments financed by debt; and --Deterioration of the credit profile of either Cosan or Cosan Logistica. Future developments that may, individually or collectively, lead to a positive rating action include: --Improvement of the credit profile of either Cosan or Cosan Logistica; --Expectation of stronger than anticipated debt service coverage ratio at Cosan Limited based on more robust dividends received. LIQUIDITY Fitch expects Cosan Limited's liquidity profile to improve following the proposed issuance of USD500 million in Global Notes due 2024, as the company will use USD230 million to prepay existing indebtedness maturing in December 2018. Cosan Limited's total debt consists of only this bank debt taken on to finance the acquisition of Cosan Logistica's shares. Cosan Limited posted healthy debt service coverage ratios on a standalone basis as of June 30, 2017, with cash plus dividends received-to-short-term debt ratio at 103x. At the same date, the company reported a cash position of BRL336 million and total debt of BRL678 million, of which short-term debt was BRL9 million. Dividends received amounted to BRL598 million in the LTM ended June 30, 2017. The group's strong financial flexibility relative to its access to the debt and capital markets, in combination with dividends received from Comgas, Raizen Energia and Raizen Combustiveis, ensures strong refinancing capacity for Cosan Limited. Fitch believes Cosan Limited also has the flexibility to reduce the payouts to its shareholders if necessary. FULL LIST OF RATING ACTIONS Fitch has assigned the following rating to Cosan Limited: --USD500 million proposed senior unsecured Global Notes due 2024 at 'BB'. Fitch currently rates Cosan Limited as follows: --Long-Term Foreign and Local Currency IDRs 'BB'. The Rating Outlook is Stable. Contact: Primary Analyst Claudio Miori Associate Director +55-11-4504-2207 Fitch Ratings Brasil Ltda Alameda Santos, 700 - 7 andar, Sao Paulo, SP, CEP 01418-100 Secondary Analyst Gisele Paolino Director +55-21-4503-2624 Committee Chairperson Mauro Storino Senior Director +55-21-4503-2625 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Hybrids Treatment and Notching Criteria (pub. 27 Apr 2017) here Rating Investment Holding Companies (pub. 13 Jan 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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