-- Brazil-based conglomerate Cosan continues to grow and diversify its portfolio through acquisitions.
-- We are revising the outlook to positive from stable and affirming our 'BB' global scale ratings on Cosan.
-- The positive outlook reflects the possibility that we may upgrade the company if it's able to consolidate acquired operations, boosting cash flows and using excess cash to pay down debt.
On Oct. 11, 2012, Standard & Poor's Ratings Services revised the outlook on Cosan S.A. Industria e Comercio and its controlling company, Cosan Ltd. (jointly referred to as Cosan) to positive from stable. At the same time, we affirmed our 'BB' global scale ratings on the company.
The outlook revision reflects our view that the company improved its business risk profile after it acquired several gas and fuel distributors and increased its logistics operations, which, in our opinion, result in more stable sources of cash flows. At the same time, we believe that the acquisitions, which Cosan financed with long-term funding with favorable debt amortization profile, will result in higher cash flow generation.
We now assess the company's business risk profile as "satisfactory." We consolidate into the company's numbers all the entities over which it has the full control, access to cash position and cash flows, and decision over dividends. These entities are:
-- Lubricant business, Cosan Combustiveis e Lubrificantes S.A.;
-- Land operations business, Radar (not rated), which is expected to be consolidated into Cosan's figures in 2013;
-- Logistics operations business, Rumo (not rated);
-- Comgas (not rated), in which Cosan will hold a 60% stake.
-- Our pro forma figures exclude the cash flows from its sugar retail business, which Cosan sold to Camil Alimentos S.A. (BB-/Positive/--). The completion of the sale is expected during the third quarter of 2013.
We incorporate the solid business profile of Raizen (Raizen Combustiveis S.A. and Raizen Energia S.A.; BBB/Stable/--) in our analysis of Cosan. Half of Raizen's results are consolidated on Cosan's balance sheet. However, we analyze Raizen as a separate entity because Cosan doesn't have the full access to its cash position and cash flows and we expect Raizen to fund itself as an independent company. We view Raizen's dividend upstream, which we estimate at about R$400 million in 2013, as a source for Cosan's debt repayment because they represent a stable source of cash flow.
We assess Cosan's financial risk profile as "significant." Excluding Raizen's results, Cosan's leverage ratios are high for the rating category: total adjusted debt to EBITDA of about 6.4x in 2013 and 5x in 2014, which includes the 100% debt-financed acquisition of Comgas. The consolidated figures show this ratio close to 4.2x in fiscal 2013 and 3.7x in fiscal 2014. If we look at Cosan's stand-alone figures, adding only the dividends from Raizen, leverage would be close to 5x in 2013 and less than 4x in 2014. We don't foresee any refinancing risk due to an EBITDA generation of about R$1.4 billion, bolstered by Raizen's cash dividends, and annual debt maturities of about R$1 billion. Moreover, Cosan has been able to refinance a portion of its debt maturities while sustaining a capital structure with a long-term profile.
We estimate the subsidiaries' cash flows to gradually increase due to the ramp-up of its logistics assets and the expansion of Comgas's distribution network and the lubricants business's international and domestic sales. We adjust Cosan's debt by renegotiated taxes and leasing agreements, and adjust EBITDA by subtracting Raizen's crop treatment and biological assets, which result in considerably different ratios from those the company reports.
We view Cosan's liquidity as "adequate." In our liquidity analysis, we incorporate the approved credit lines from Brazilian Development Bank (BNDES) to fund Cosan's infrastructure projects, including the expansion of its railroad and storage capacity at Rumo and Comgas's distribution networks. We also assume that Cosan won't inject additional equity into its subsidiaries, as each one is operated and funded independently.
Sources of cash includes a cash position of about R$1 billion (excluding the 50% stake in Raizen), annual funds from operations (FFO) of more than R$800 million, annual dividends of about R$400 million from Raizen, and BNDES loans of about R$600 to R$700 million, which account for about 60% of the new projects' funding. We believe that the expansion capex is discretionary and would only be accomplished with access to adequate long-term funding. Uses of cash include annual capital expenditures of about R$1 billion, short-term debt maturities of around R$1 billion, and dividends distribution of R$200 million
- R$250 million. We also assume that Cosan will finance the Comgas's acquisition with long-term funding. We expect sources of cash to exceed uses by more than 1.2x in the next 12-18 months. We also expect sources to continue exceeding uses even if EBITDA declines by 20%.
The company has comfortable headroom under its covenant triggers, due to the dividend upstream from Raizen, which will receive a capital infusion of $540 million from one of its main shareholders, Royal Dutch Shell, by the end of fiscal 2013 (ending March 2013).
The positive outlook reflects our expectation that we could upgrade Cosan if it maintains pro forma adjusted debt to EBITDA of less than 3.5x and adequate liquidity amid its expansion. The smooth debt amortization profile and expected higher cash flows should contribute to stronger leverage metrics following the Comgas acquisition. We could take a negative rating action or revise outlook to stable if an acquisition depletes liquidity and increases leverage, pressuring cash flows and increasing refinancing risk. We could also revise the outlook back to stable if the company doesn't deleverage as we expect in the next 12 to 18 months. This could happen if it fails to increase cash flows or use excess cash to increase dividend payments or for additional acquisitions, instead of paying down debt.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Cosan Overseas Limited
Senior Unsecured BB
Cosan S.A. Industria e Comercio
Senior Unsecured BB
Ratings Affirmed; CreditWatch/Outlook Action
Cosan Combustiveis e Lubrificantes S.A.
Cosan S.A. Industria e Comercio
Corporate Credit Rating BB/Positive/-- BB/Stable/--
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