Fitch has placed the proposed issuance on Rating Watch Negative, following the last rating action taken on GVO's ratings on
KEY RATING DRIVERS
GVO and Virgolino Finance's ratings reflect the group's leveraged capital structure and tight liquidity position. The ratings further incorporate the issues associated with the cyclicality of the sugar and ethanol commodities' price cycle, as well as the volatility of cash flow generation. It also reflects the exposure of GVO's sugarcane production business to weather conditions, foreign currency risk relative to a large portion of its debt; and the ethanol industry dynamics, which are strongly linked to
The ratings benefit from GVO's adequate business model and the geographical location of its production units. The ratings also incorporate positively GVO's strategic shareholding position in Copersucar and its long-term commercial partnership with this cooperative. The Rating Watch Negative reflects Fitch's concerns about GVO's high debt refinancing risks.
High Refinancing Risk:
GVO's liquidity is under pressure, to which the recent financial problems of another company in the sugar and ethanol business (Aralco) plays a role. The company has just concluded negotiations with two domestic banks to rollover its short-term debt, with the amount involved of
GVO presents a weak financial profile underpinned by its aggressive capital structure in a volatile sector. In the last 12 months (LTM) ended
Cash Flow Generation to Improve:
GVO's main challenge is to effectively reduce leverage through improved operational cash flow in the next two years. Positively, GVO has concluded its expansion program and as a result Fitch expects GVO to be able to enhance its FCF generation. During the LTM ended on
Relationship with Copersucar Viewed as a Positive:
GVO has an adequate business profile, based on its favorable location, diversified production base and operational flexibility. The company runs a total crushing capacity of 12 million tons. GVO enjoys competitive advantages linked to its participation in Copersucar, which allows it to maintain EBITDAR margin in line with the industry average. The company benefits from Copersucar's robust scale, which mitigates demand risks, lower logistics costs and provides better stability in the company's collection flow. Copersucar accounts for approximately 22% of crushed sugar cane in the Central South region of
GVO's businesses are exposed to the volatility of the sugar and ethanol prices. The company transfers 100% of its production to Copersucar through a long-term exclusivity contract. Prices for its products are linked to the average sugar and ethanol market prices plus a small premium. Copersucar remunerates GVO based on the realized production on a monthly basis during the year, independently of the moment the sale to the final customer occurs. This translates to a higher flexibility in GVO's working capital management compared to other companies that face seasonality in their activities.
Fitch contemplates in the analysis that GVO has some flexibility related to its debt with Copersucar, as the main shareholder of this cooperative. Those loans, included in the debt amount as per Fitch's criteria, typically involve lower refinancing risks than a regular bank or capital market debt. GVO can tap its credit line with Copersucar of over
High Exposure to FX Fluctuations:
GVO's debt profile has a relevant exposure to foreign exchange movements with 58% of debt denominated in USD at the end of
The failure or delay to roll over its short-term debt in the near term should place GVO on a difficult financial situation and negatively pressure the ratings. The Rating Watch Negative may be removed should significant liquidity improvements occur.
Fitch currently rates GVO and Virgolino Finance as follows:
--Foreign and local currency IDRs 'B-';
--Long term National Scale Rating 'BB+(bra)';
Virgolino de Oliveira Finance S/A
--Foreign and local currency IDRs 'B-'.
Additional information is available 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
--'National Scale Ratings Criteria' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
National Scale Ratings Criteria
Fitch Ratings Brasil Ltda
Source: Fitch Ratings
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