News Column

Fitch Affirms & Removes Watch Negative from GVO's IDRs; Outlook Negative Assigned

August 27, 2014

SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings has affirmed and removed Virgolino de Oliveira S.A. Acucar e Alcool's (GVO) and Virgolino de Oliveira Finance S/A's (Virgolino Finance) foreign and local currency Issuer Default Ratings (IDRs) from Rating Watch Negative. Fitch also removed the ratings on GVO national scale long-term rating and GVO and Virgolino Finance's associated debts from Rating Watch Negative. Fitch assigned a Negative Outlook to all corporate ratings. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The Rating Watch Negative was removed considering that GVO's liquidity has improved and refinancing risks have diminished substantially for the coming months. Negotiations with two domestic banks have proved successful and proceeds coming from the senior secured bonds due 2020 strengthened GVO's cash position, enhancing the company's short-term debt repayment prospects. The company's liquidity also benefited from substantially improved operating cash flow in fiscal 2014.

The Negative Outlook was assigned to the ratings based on the more difficult scenario for the sugar and ethanol sector in Brazil. GVO's main challenge is to keep generating robust operating cash flows amid lower crushed volumes expected for fiscal 2015 and still depressed sugar prices. In addition, the company still relies on the availability of credit lines to rollover its debt, keep a more robust liquidity position and higher short-term debt coverage ratio.

GVO and Virgolino Finance's ratings continue to reflect the group's leveraged capital structure for the sector. The ratings further incorporate the issues associated with the cyclicality of the sugar and ethanol commodities' price, which leads to a volatile cash flow generation. They also reflect 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 Brazil's regulated gasoline prices and related government energy policies.

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.

Liquidity Improved:

GVO's liquidity increased and short-term refinancing prospects improved over the past months at the expense of the challenging refinancing scenario for sugar and ethanol companies that followed the financial problems of another company in the sugar and ethanol business (Aralco). GVO extended repayment terms with two domestic banks under a total debt amount of BRL200 million and issued USD135 million senior secured bonds due 2020, which altogether improved GVO's cash position and the cash to short-term debt coverage ratio. Pro forma figures adjusted by Fitch to include the new bond issuance and the recent debt rollovers puts GVO's cash at BRL407 million compared to a total short-term debt of BRL688 million as of April 30 2014, which includes Copersucar debt of BRL366 million. As of April 30, 2014, GVO's actual cash and marketable securities of BRL154 million was tight and covered only 0.2 time (x) its short-term debt of BRL769 million.

Cash Flow Generation Should Fall:

Fitch expects lower free cash flow (FCF) in fiscal 2015 based on the current scenario for the sector and improvements should occur from fiscal 2016. GVO's cash flow from operations (CFFO) in fiscal 2014 benefited largely from an all-time high crushed volume of 12.2 million tons and the large scale gains that followed. Positive fluctuations of working capital requirements also played a role. GVO's main challenge is to keep generating robust CFFO amid a scenario of depressed sugar prices and lower crushed volumes that should follow unusually dry weather in Brazil's Center South in 2014. Fitch forecasts that agricultural yields will fall and lead the company to report total crushing of around 11 million in fiscal 2015, hampering its CFFO. As of the fiscal 2014 the company's CFFO of BRL595 million was able to meet capital expenditures of BRL335 million, resulting in a positive FCF of BRL260 million.

High Leverage:

GVO presents a weak financial profile underpinned by its aggressive capital structure in a volatile sector. Positively, as of April 30 2014, the company's net adjusted debt/EBITDAR of 4.8x (considering Copersucar dividends) compares favourably with the 5.1x in April 2013. Excluding advances from Copersucar backed by sugar and ethanol inventories (BRL432 million), GVO's net adjusted debt/EBITDAR would be 4.1x for the same period. This high leverage results from the combination of large capital expenditures during the last harvests, which included crop expansion to increase the contribution of owned sugar cane supply. Fitch expects net adjusted leverage to grow to around 6.0x in fiscal 2015 and fall to around 5.0x in fiscal 2016 and 2017.

Positive Links to Copersucar:

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 the cooperative 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 Brazil and for 11% and 12% of the global trade of sugar and ethanol, respectively, making it an important price making agent. Copersucar is formed by 47 mills that belong to 24 independent economic groups. Its members crushed 118 million tons of sugar cane in the 2012-2013 season.

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 as long as it is able to crush sugar cane and deliver sugar and ethanol to the cooperative. This facility is an important liquidity source for GVO, especially in periods of more restrictive access to credit. As of April 30, 2014, GVO's debt with Copersucar was BRL432 million or 14% of total adjusted debt of BRL2.9 billion. The short-term debt with this cooperative of BRL366 million accounted for 48% of total short-term debt.

High Exposure to FX Fluctuations:

GVO's debt profile has a relevant exposure to foreign exchange movements with 58% of debt denominated in USD as of April 30, 2014. The principal amount of its foreign currency debt is not protected through derivatives, with this risk partially mitigated by the fact that the price for GVO's products is linked to the dollar. The company hedges its coupons payments. As of April 30, 2014, consolidated adjusted debt including obligations related to leased land was BRL2.9 billion. GVO's debt is comprised of two international notes issuances (45%); loans granted by Copersucar (15%); trade related transaction (14%), land lease agreements according to Fitch's methodology (17%); financings from the Brazilian Economic Social and Development Bank (BNDES, 7%); others (2%).

RATING SENSITIVITIES

A downgrade could take place should GVO's liquidity deteriorate further from the pro forma levels. The combination of a small cash position compared to short-term debt and the company's inability to keep rolling over substantial portions of its debt could trigger a downgrade.

A positive rating action could occur should significant liquidity improvements occur both in terms of cash to short-term debt and CFFO generation, which should remain robust.

Fitch has affirmed the following ratings of GVO and Virgolino Finance:

Virgolino de Oliveira S.A. Acucar e Alcool

--Foreign and local currency IDRs at 'B-';

--Long term national scale rating at 'BB+(bra)';

--BRL100 million senior unsecured debentures due 2014 at 'BB+ (bra)'.

Virgolino de Oliveira Finance S/A

--USD300 million senior unsecured notes due 2022 at 'B-/RR4';

--USD135 million senior secured notes due 2020 at 'B-/RR4';

--Foreign and local currency IDRs at 'B-'.

The Watch Negative was removed from all ratings and a Negative Outlook was assigned to the corporate ratings.

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

Applicable Criteria and Related Research:

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

--'National Scale Ratings Criteria' (Oct. 31, 2013).

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

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=859135

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

Claudio Miori

Associate Director

+55-11-4504-2207

Fitch Ratings Brasil Ltda

Alameda Santos, 700 - 7 andar, Sao Paulo, sp CEP 01418-100

or

Secondary Analyst

Alexandre Garcia

Associate Director

+55-11-4504-2616

or

Committee Chairperson

Ricardo Carvalho

Senior Director

+55-21-4503-2627

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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