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Rating Action:

Moody's affirms Cosan's corporate family rating

 The document has been translated in other languages

08 May 2019

Sao Paulo, May 08, 2019 -- Moody's America Latina ("Moody's") has today affirmed Cosan S.A. ("Cosan")'s corporate family ratings at Ba2 in the global scale and Aa1.br in the national scale rating (NSR). The outlook is stable.

Ratings affirmed:

Issuer: Cosan S.A.

- Corporate Family Rating: Ba2

- Corporate Family Rating (NSR): Aa1.br

Outlook Actions:

Issuer: Cosan S.A.

- Outlook, Remains Stable

RATINGS RATIONALE

The Ba2 corporate family rating reflects the credit risk of Cosan S.A., a conglomerate supported by a diversified portfolio of businesses, including the entire sugar-ethanol chain, fuel and gas distribution, and lubricants production and distribution, and its adequate liquidity profile. The company's diversification, especially towards stable and resilient businesses such as the fuel and gas distribution, translates into a stable cash source over the long-term.

We expect Raízen, formed by Raízen Energia S.A. ("Raízen Energia", Ba1/Aaa.br stable) and Raízen Combustíveis S.A. ("Raízen Combustíveis", Ba1/Aaa.br stable), and Cia de Gás de São Paulo - COMGAS ("Comgás", Ba1/Aaa.br stable) to distribute a significant amount of dividends over the next several years, which will be the primarily liquidity source to service Cosan's obligations. For 2019 we expect over BRL 2 billion in dividends from subsidiaries, compared to an average BRL 1.8 billion per year in the last 4 years.

Constraining Cosan's ratings are it's still-complex structure, ongoing possibility of further corporate restructuring, possibility of high dividend upstream to Cosan Limited (although the company is likely to generate more than enough cash to fund those dividends and reduce leverage) and an acquisitive growth history. At the holding level, there has not been any significant acquisitions over the past few years, but Raízen has made a $918 million acquisition in Argentina, pushing leverage temporarily higher on pro forma figures. Despite the Raizen 50%/50% joint venture (controlled by Cosan and Shell Brazil Holdings BV, a 100% subsidiary of Royal Dutch Shell Plc ("Shell", Aa2 stable) not being consolidated in Cosan's audited financials, the pro-forma metrics incorporate Raízen's proportional EBITDA, therefore the underlying volatility in the sugar-ethanol business, and proportional debt.

Moody's views Cosan S.A. as a conglomerate with no particular dominant business and for that reason we are applying the Investment Holding Companies and Conglomerates Methodology to assess the group´s ratings. The credit risk assessment of a conglomerate needs to incorporate a balanced view about the credit risk in each business segment and its overall contribution to the credit quality of the group. A conglomerate rating under this particular definition is more likely to be a weighted sum-of-the-parts, as opposed to a weak-link risk or best credit risk within a group of companies.

The bulk of Cosan's cash generation comes from dividends from Raízen and Comgás and, consequently, we see the debt at the holding level as structurally subordinated to the debt at the operating companies. In December 2018, at the holding level there was BRL2.1 billion in cash with no relevant maturities in the short term. Its consolidated cash position in the same period was BRL5.9 billion, including Comgás and Raizen, which represents a cash coverage of short-term debt of 2.0x. Furthermore, Cosan's subsidiaries have good market access in Brazil and abroad, which reduces liquidity risks associated with large investment programs.

Cosan's leverage considering the proportional consolidation of Raizen's EBITDA and debt increased to 4.4x in December 2018 from 3.7x in December 2017. The increase reflects mainly a lower EBITDA contribution along with working capital needs associated with high inventory levels from Raízen Energia and the debt raised by Raízen Combustíveis to fund its USD 918 million acquisition of Shell refining and fuel distribution assets in Argentina. We expect Cosan's leverage to decline to 3.9x to 3.5x in the next 12 to 18 months, even considering Cosan's debt increase to fund the acquisition of an additional stake in Comgás shares.

The stable outlook reflects our view that Cosan will maintain an adequate liquidity and consistent coverage of interest expenses with dividend upstream from its subsidiaries. It also considers that the company will conduct any future acquisition plans in a prudent manner, in order not to impact its current credit metrics.

A downgrade of Cosan's ratings could result from negative rating actions on Comgás or Raízen or if liquidity deteriorates. In addition, the ratings could be downgraded if total adjusted debt to EBITDA is sustained above 4.0x. (All pro-forma ratios including Raizen figures).

An upgrade of Cosan's ratings could result from positive rating actions on Comgás or Raízen. In addition, the company would have to maintain an adequate liquidity and gross leverage below 3.2x (All pro-forma ratios including Raizen figures).

Headquartered in São Paulo, Brazil, Cosan S.A. (Cosan) is a holding company with a stake in Raízen, a 50/50 joint venture with Shell Brazil Holdings BV, a 100% subsidiary of Royal Dutch Shell Plc ("Shell", Aa2 stable), and a 94.9% stake in Comgás. Raízen delivered revenues of BRL98.9 billion (around $27.0 billion) in 2018. Raízen Energia is one of the leading global companies in the sugar-ethanol segment with an installed crushing capacity of over 70 million tons. Raízen Combustíveis is the second-largest Brazilian fuel distributor, operating 6,524 gas stations, operating under the Shell brand name. Comgás, with annual net revenue of around BRL6.8 billion (around $1.9 billion) in 2018, is Brazil's largest natural gas distributor, providing natural gas to industrial, residential, commercial, automotive, thermal-power generation and cogeneration consumers. The company benefits from an attractive concession area strategically located in one of the most densely populated and economically robust regions in the country.

The principal methodology used in these ratings was Investment Holding Companies and Conglomerates published in July 2018. Please see the Rating Methodologies page on www.moodys.com.br for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113601.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, public information and confidential and proprietary Moody's information.

Information types used to prepare the rating are the following: financial data, economic and demographic data, debt documentations, operating data, historical performance data, public information, Moody's information, and regulatory filings.

Sources of Public Information: Moody's considers public information from many third party sources as part of the rating process. These sources may include, but are not limited to, the list available in the link https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1155814.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Please see the ratings disclosure page on www.moodys.com.br for general disclosure on potential conflicts of interests.

Moody's America Latina Ltda. may have provided Other Permissible Service(s) to the rated entity or its related third parties within the 12 months preceding the credit rating action. Please go to the report "Ancillary or Other Permissible Services Provided to Entities Rated by Moody's America Latina Ltda." in the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172726 for detailed information.

Entities rated by Moody's America Latina Ltda. and the rated entities' related parties may also receive products/services provided by parties related to Moody's America Latina Ltda. engaging in credit ratings activities within the 12 months preceding the credit rating action. Please go to the link

http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172728 for a list of entities receiving products/services from these related entities and the products/services received.

The date of the last Credit Rating Action was 10/04/2018.

Moody's ratings are constantly monitored, unless designated as point-in-time ratings in the initial press release. All Moody's ratings are reviewed at least once during every 12-month period.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.br.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see ratings tab on the issuer/entity page on www.moodys.com.br for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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.br for further information.

Please see Moody's Rating Symbols and Definitions on the Ratings Definitions page on www.moodys.com.br for further information on the meaning of each rating category and the definition of default and recovery.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com.br for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com.br for additional regulatory disclosures for each credit rating.

Erick Rodrigues
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

No Related Data.
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