News Column

Fitch Affirms Votorantim's Ratings; Outlook Remains Negative

August 25, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following ratings for Votorantim Participacoes S.A. (Votorantim) and its subsidiaries. A complete list of related rating actions follows at the end of this press release.

The Rating Outlook remains Negative.

KEY RATING DRIVERS

Excellent Cement Business

Votorantim Cimentos (VCSA) is the key operating subsidiary of Votorantim Participacoes S.A. (VPAR), which is further organized under VPAR's industrial subholding company, Votorantim Industrial S.A. (VID). VCSA continues to be the backbone of the parent company's rating. VCSA accounted for 67% of VID's EBITDA and 69% of its net debt during 2013. VCSA is poised to improve its operating cash flows due to investments that have increased its cement capacity in Brazil from 23 million tons per year (mtpy) to 32 mtpy since 2011. Fitch projects VCSA's standalone net debt-to-EBITDA ratio will decline to 2.8x in 2014 from 3.3x in 2013. During May 2014, the company received an unfavorable ruling from Brazil's anti-trust agency, CADE, that resulted in a BRL1.5 billion fine and the forced sale of certain assets. VCSA has announced its intent to appeal the ruling. The company will most likely be forced to post guarantees during the appeal process, which is expected to extend beyond 2014. In the event that VCSA has to pay the fine during 2014, Fitch projects pro forma net leverage would be approximately 3.2x.

Intercompany Debt Guarantees

Several cross-guarantee structures exist within the group, which VID is currently unwinding, despite VID's desire to have each subsidiary finance their respective operations on a stand-alone basis. In March 2014, VID and its subsidiary Companhia Brasileira de Aluminio (CBA) repurchased approximately USD900 million of notes due in 2019 and 2021 that were issued by VID and CBA, respectively. The 2019 bond is guaranteed by VPAR (100%), VCSA (50%) and 50% CBA and the 2021 bond is guaranteed by VPAR (100%) and VCSA (50%). VCSA has USD1.250 billion of notes due in 2041 that have a 100% guarantee from VID. Until the undoing of the cross-guarantee structure nears completion, Fitch will continue to closely link the ratings.

High Leverage Affects Outlook

The ratings of VPAR, VID and VCSA were assigned a Negative Outlook during August 2013 because two deleveraging events did not occur as expected in 2013. The postponement of these initiatives delayed VID and VCSA's ability to reach its targeted net debt level of around 2.0x. Fitch Ratings believes it will be a challenge for the companies to reach net leverage of around 2.50x by the end of the year without any extraordinary measures.

Strong Liquidity

VID had BRL22.2 billion of total debt and BRL4.8 billion of cash and marketable securities as of March 31, 2014. VID faces amortizations of BRL1.5 billion during 2014 and BRL1.8 billion during 2015. Current cash on hand can cover approximately three years of debt amortization. VID has strong capital market access in both Brazil and abroad.

Strong Growth Prospects in Mining

VID owns 50.06% of Compania Minera Milpo S.A. (Milpo), which is a low-cost polymetals miner based in Peru, with zinc accounting for 41% of its 2013 revenues, followed by copper (33%), silver (19%), lead (6%) and gold (1%). Cash flow generation at Milpo has historically been robust due to its competitive position on the cost curve. Milpo's consolidated cash cost of production improved to USD35 per metric ton (mt) of treated ore in 2013 from USD36.11 per mt in 2012, due to efficiency gains. Fitch links Milpo's credit strength to that of its parent as it is listed as a 'Material Subsidiary' for the cross-default and acceleration provisions on Votorantim debt. Milpo's net leverage ratio is expected to be around 0.2x in 2014.

Related Ratings

The main subsidiaries of VPAR that are not part of VID are the company's 50%/50% orange juice joint venture and Votorantim Finance, which is the holding company for Banco Votorantim, which is 49.9% owned by Banco do Brasil (BdB) and is rated 'BBB-'. Analytically, Fitch strips away the financial metrics of VF from VPAR's consolidated figures and focuses on the standalone credit metrics of VID.

Strong Market Pulp Position

VID owns 29% of Fibria Celulose S.A. (Fibria), which is the world's largest producer of market pulp, with 5.3 million tons of bleached eucalyptus kraft market pulp capacity. Fibria is among the lowest cost producers of pulp globally. While this entity is no longer consolidated within the group, it remains a positive credit consideration to VID's rating. Fibria's leading position is viewed as sustainable due to its ownership of 970,000 hectares of land in Brazil, upon which it has developed 561,000 hectares of eucalyptus plantations. The land had an accounting value of USD530 million, and forestry plantations on this land had an accounting value of USD1.450 billion. Fitch projects that Fibria will generate about USD1.3 billion of EBITDA in 2014 and that its net leverage will decline to around 2.0x from 2.4x in 2013.

RATING SENSITIVITIES

Downturn in Brazil Economy: VID's rating could be negatively affected by a significant deterioration in the global macroeconomic and business environment, resulting in declining profitability and weaker credit metrics or significantly higher levels of capex, leading to negative FCF. Fitch could downgrade VID if net leverage is not below 2.5x by the end of 2015.

Improved Credit Metrics: Factors leading to the consideration of a Stable Outlook include lower absolute and positive Free Cash Flow generation resulting in improved credit metrics.

Fitch affirms the following:

Votorantim Participacoes S.A. (Votorantim)

--Foreign and local currency Issuer Default Ratings (IDRs) at 'BBB';

--National scale rating at 'AAA(bra)'.

Votorantim Industrial S.A. (VID)

--Foreign currency IDR at 'BBB'.

Companhia Brasileira de Aluminio (CBA)

--2019, 2021, and 2024 guaranteed notes at 'BBB'.

Voto-Votorantim Overseas Trading Operations IV Limited

--2020 notes at 'BBB'.

In addition, Fitch has affirmed and withdrawn the following ratings:

Companhia Brasileira de Aluminio (CBA)

--Foreign currency IDR at 'BBB'.

Voto-Votorantim Overseas Trading Operations IV Limited

--Foreign currency IDR at 'BBB'.

These ratings were withdrawn as these entities are no longer considered analytically meaningful for the credit quality of the notes that have been issued out of them. All of the aforementioned notes that have been issued by these entities were fully guaranteed by Votorantim and its subsidiaries, and the ratings of those issuances remain outstanding.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'National Ratings Criteria' (Oct. 30, 2013);

--'Evaluating Corporate Governance' (Dec. 12, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=856996

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Phillip Wrenn

Associate Director

+1-312-368-2075

70 West Madison Street

Chicago, IL 60602

or

Joe Bormann, CFA

Managing Director

+1-312-368-3349

or

Committee Chairperson

Ricardo Carvahlo

Senior Director

+1-312-368-2070

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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