Approximately $ 1,150 million of debt securities affected including the new issuance
Sao Paulo, October 25, 2010 -- Moody's Investors Service upgraded Cosan S.A. Industria
e Comercio S.A.'s ("Cosan", the
company) corporate family rating (CFR) to Ba2 from Ba3. Also impacted
by our rating action are Cosan Finance Limited's $400 million
7% senior unsecured notes due 2017 and Cosan S.A.'s
$450 million senior unsecured perpetual notes which were both similarly
upgraded to Ba2 from Ba3. This action completes the review process
for a potential upgrade which we commenced on March 1, 2010 after
Cosan and Shell International Petroleum Company Limited ("Shell")
announced their intention to create a $12 billion joint venture
(the "Joint Venture") to produce and commercialize ethanol
and power from sugar cane and distribute a variety of industrial and transportation
fuels through a combined distribution and retail network in Brazil.
At the same time Moody's assigned a Ba2 rating to Cosan Overseas
Limited's proposed $300 million senior unsecured perpetual
notes issuance, which initially will be unconditionally guaranteed
by Cosan and by CCL upon the completion of the proposed joint venture
with Shell . The outlook for the CFR and the proposed note offering
However, we are assigning a positive outlook on the company's
existing 2017 senior unsecured and existing perpetual notes (both securities
will be contributed to the Joint Venture) .
The upgrade, which is predicated on our view that the Joint Venture
will be consummated on basically the terms and within the time frame that
has been communicated by the company, reflects the anticipated improvement
in the credit and business profile of Cosan upon closing of the transaction.
In our analysis we have considered the anticipated strong credit profile
of the Joint Venture albeit offset in part by the lack of full ownership
and control of the Joint Venture by Cosan. Specifically,
the Joint Venture is expected to enhance Cosan's credit profile
in three ways. First, based on the expected dividend stream
from the Joint Venture, we believe that Cosan's cash flow
will demonstrate less volatility given the more stable characteristics
of the fuel distribution business to be contributed by Shell. Second,
Cosan will gain access to what will now be Brazil's third largest
fuel distributor for its ethanol and the JV will provide Cosan with a
better capitalized vehicle to take advantage of the attractive yet capital
intense sugar ethanol prospects in the Brazilian market. Third,
Cosan will transfer significant amount of its debt to the JV and likely
enjoy lower leverage post restructuring.
In our analysis we have also taken into consideration the challenges in
running a business where both parties have equal decision making power,
the current lack of clarity with regard to the Joint Venture's expected
synergies, financial performance objectives, policies and
strategic initiatives, the rebranding of Cosan's existing
fuel distribution network, and execution risk.
As part of the joint venture agreement, Cosan and Shell will create
three new legal entities and both parties will contribute certain assets
A management company, in which both parties will have an equal 50%
economic and voting interest, will be the principal vehicle through
which the partners will run the contemplated venture. Day-to-day
operations will be conducted out of two newly to be formed operational
joint ventures. A Sugar and Ethanol Company (the "S&E
JV"), in which both parties have an equal economic interest
but which will de facto be controlled by Cosan (who will have 51%
of the voting shares), will run the production of sugar and ethanol
as well as the co-generation activities. A Downstream Company
(the "Downstream JV"), in which both parties also hold
equal economic interests but which will be controlled by Shell (having
51% of the voting shares), will conduct the supply,
distribution and sale of the Joint Venture's fuel business.
Cosan will contribute to the Joint Venture principally all of its sugar
and ethanol mills and ethanol logistics assets, all of its energy
co-generation business and fuel distribution and retail businesses.
Additionally, Cosan will contribute an estimated USD 2.5
billion plus BRL 500 million of existing debt and general working capital
liabilities. Shell will contribute its Brazilian fuel distribution
and retail as well as its jet fuel businesses, its equity stake
in two next generation biomass fuel research ventures as well make an
estimated $1.6 billion in cash payments over a two year
It is contemplated that the cash management for the two operating joint
ventures will be run on a consolidated basis and all contributed debt
plus that the debt to be issued will benefit from cross guarantees between
the two joint ventures. While Moody's does not rate the Joint
Venture, we believe that based on the available information today
the credit quality is likely to be higher than that of Cosan on a standalone
basis following completion of the Joint Venture.
Under the terms of the joint venture, Shell will have the option
at the 10th anniversary to buy 50% or all of Cosan's stake
in the proposed Joint Venture. In addition, at the 15th anniversary,
Shell will have another option to acquire all or the remaining interest
of Cosan in the Joint Venture. If Shell does not exercise the option,
Cosan will have the option to acquire Shell's stake in the Joint
While the change of control provision in the proposed note indenture provides
reasonable protection to bondholders if Shell were to exercise in full
its call option to acquire Cosan's interest in the Joint Venture
at its 10th or 15th anniversary, this is not the case if Shell were
to acquire only half of Cosan's 50% stake in the venture
at the 10th anniversary . Under the terms of the indenture,
a change of control which results in a ratings decline will give bondholders
the right to put the bonds back to the issuer or guarantors at 101%
plus accrued interest. The change of control provision is triggered
only if Cosan sells all or substantially all of its assets (which would
include its interest in the Joint Venture) and if Cosan does not use the
proceeds from such a sale to make permitted reinvestments within 360 days
of receipt. Permitted reinvestments are defined to include the
permanent repayment of debt (except for subordinated debt) or certain
investments in permitted businesses and productive assets (as defined
in the indenture).
The Joint Venture, which is still subject to regulatory approvals
in Europe and Brazil is scheduled to close on March 31, 2011,
which will coincide with the end of the fiscal year of Cosan.
Upon completion of the joint venture, earnings of the Cosan will
be derived principally from the dividends it will receive from its equity
stake in the S&E and Downstream JVs. Additional contributions
will come from dividends from its 69.7% stake in Rumo Logistica,
its 18.9% stake in Radar as well as all of the earnings
from its remaining lubes business ("CCL Lubricants").
Cosan's guarantee will also benefit from certain land holdings which will
stay with the Company following the completion of the Joint Venture.
The stable outlook on the company's CFR and the proposed note offering
reflects our expectation that the ratings will not likely experience upwards
pressure over the near term as it will receive the benefits from the Joint
Venture only in an indirect manner through the payment of future dividends.
Additionally, Cosan will have to share all decision making on an
equal basis with Shell limiting its control over the Joint Venture's
strategy and financial policies.
The positive outlook on Cosan's existing debt securities which are
expected to be contributed to and assumed by the Joint Venture reflects
our view that the Joint Venture is likely to have better credit fundamentals.
As such these existing securities are likely to experience upwards ratings
pressure over time.
Ratings on the existing notes could experience upwards pressure if the
Joint Venture adopts financial policies which would be commensurate with
an investment grade profile while simultaneously providing consistent
dividend payments meaningfully above the minimum 25% pay-out
ratio as currently contemplated, the expectation of a sustainable
improvement in financial leverage and more stable cash flows.
Ratings could experience downward pressure if the Joint Venture adopts
financial policies which are not commensurate with an investment grade
credit profile, earnings and cash flows do not demonstrate the expected
reduction in volatility, and Cosan adopts more aggressive financial
and or strategic policies then currently contemplated.
The principal methodology used in rating Cosan S.A. Industria
e Comercio was Global Food - Protein and Agriculture Industry rating
methodology published in September 2009. Other methodologies and
factors that may have been considered in the process of rating this issuer
can also be found on Moody's website.
Headquartered in Piracicaba, Brazil, Cosan S.A.
Industria e Comercio) is a low-cost Brazilian sugar / ethanol producer.
It is the largest sugar producer in Brazil and the third largest sugar
producer in the world, having sold 4.1 million tons of sugar
in fiscal year 2010. It is also the largest exporter of sugar in
Regarding its ethanol business, Cosan is the largest ethanol producer
in Brazil and the second largest in the world, having sold 2.1
billion liters in fiscal year 2010, and the largest exporter of
ethanol in the world. Notably, the group is the largest grower
and processor of sugarcane in the world (twice the size of the second
player), with a crushing capacity expanded of approximately 62 million
tons as of June 30, 2010.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning/maintaining
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Senior Vice President
Corporate Finance Group
Moody's America Latina Ltda.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's America Latina Ltda.
MOODY'S UPGRADES COSAN'S RATINGS TO Ba2 AND RATES NEW PERPETUAL NOTES Ba2
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