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
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
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.
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
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
GVO presents a weak financial profile underpinned by its aggressive capital structure in a volatile sector. Positively, as of
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
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
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
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:
--Foreign and local currency IDRs at 'B-';
--Long term national scale rating at 'BB+(bra)';
--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'.
--'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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