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Global Credit Research - 17 May 2010
Buenos Aires, May 17, 2010 -- Moody's affirmed Sullair's B2 local currency corporate family
rating and A2.ar Argentina national scale rating. At the
same time, Moody's assigned B2/A2.ar ratings to Sullair's
ARS 65 million credit facilities from Banco de la Nación Argentina
("BNA"; not rated). All of the ratings assigned are local
currency ratings. The outlook for all ratings is stable.
The B2 local currency corporate family rating and A2.ar Argentina
national scale rating reflect Sullair's solid franchise and long
track record in the equipment rental market in Argentina as well as its
growing business in Brazil. The long-established commercial
relationship Sullair has with its main suppliers also support the company's
business model and its ratings. Finally, the ratings also
consider credit metrics that are stronger than those of other B rated
companies in the equipment rental industry.
Key credit negatives include Sullair's relatively small scale,
limited geographic diversification and its exposure to Argentine credit
risk. While the company's core business continues to be the
rental of equipment, power generation rental revenues have increased
substantially. Power generation revenues mostly rely on contracts
("Energía Distribuida") with ENARSA, an arm of
the Argentine government. Thus, Sullair is exposed to Argentine
government (rated B3/Stable) credit risk.
Sullair tight liquidity position also constrains the ratings. Sullair
has historically had a high proportion of short-term debt on its
balance sheet and, like most of Argentinean companies, it
does not maintain committed credit facilities. Sullair's
liquidity relies on continually refinancing uncommitted peso-denominated
bank debt and dollar- denominated supplier debt, which is
deemed less volatile than bank loans. Strong operating cash generation
is also an offsetting factor for its weak liquidity.
While the 3-year term credit facilities from BNA will improve Sullair's
debt maturity profile, Moody's views Sullair's maturity
profile as weak for its rating category. However, Moody's
recognizes that in recent years, the company has prudently managed
its short-term debt maturities and succeeded to-date in
rolling over maturities when needed.
Sullair's B2 local currency corporate family rating reflects its
global default and loss expectation, while the A2.ar national
scale rating reflects the standing of Sullair's credit quality relative
to its domestic peers. Issuers or issues rated A2.ar present
above-average creditworthiness relative to other domestic issuers.
Moody's National Scale Ratings (NSRs) are intended as relative measures
of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate between relative
risks. NSRs in Argentina are designated by the ".ar" suffix.
NSRs differ from other global scale ratings in that they are not globally
comparable to the full universe of Moody's rated entities, but only
with other rated entities within the same country.
The stable outlook assumes that Sullair will continue to successfully
develop its business model while maintaining strong credit metrics for
its rating category. The stable outlook also reflects Moody's
expectation that Sullair will maintain strong access to supplier financing
and successfully renew or refinance its short-term bank debt.
Finally, the stable outlook considers that the company will maintain
its prudent financial policy with respect to dividends.
Upward pressure on Sullair's current ratings or outlook could arise
from a substantial improvement in its liquidity profile together with
a larger revenue base, while maintaining diversification and a manageable
exposure to Argentine government credit risk. Quantitatively,
an upgrade would require a ratio of cash to short-term debt consistently
higher than 40% (9.7% as of year-end 2009),
adjusted total debt to EBITDA of below 1.5 times (1.9x as
of year-end 2009) and an EBITDA margin higher than 45% on
a three year average basis (41.5% as of year-end
Negative pressure on the current outlook or ratings could arise if the
expected recovery in the regional economy does not materialize and Sullair
is unable to quickly adjust the size of its operations and reduce investments
and leverage accordingly. Sullair's inability to secure the
BNA's credit facility could also cause negative pressure on the
outlook or ratings. Finally, a downgrade could also result
from an increased exposure to Argentine government credit risk through
its power generation business or from the lack of timely payments on its
existing contracts in this business.
Quantitatively, Sullair's rating could come under downward
pressure if its EBITDA margin falls below 25%, adjusted debt
to EBITDA moves above 3.0 times or EBIT to interest expense drops
below 1.5 times.
Headquartered in Buenos Aires, Argentina Sullair Argentina S.A.
("Sullair") is an equipment rental and power generation company
with operations in Argentina and Brazil. With annual revenues of
approximately USD 220 million for the fiscal year ending 2009, Sullair's
size is small. Its equipment fleet, however, is estimated
to be one of the larger fleets in the region, with more than 3,000
equipment units operating in Brazil and Argentina.
Vice President - Senior Analyst
Corporate Finance Group
Moody's assigns B2/A2.ar ratings to Sullair's bank facilities
Corporate Finance Group
Moody's Investors Service
No Related Data.
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