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Rating Action:

Moody's assigns Baa3/Aaa.br to Raízen; outlook stable

Global Credit Research - 10 Jul 2012

Approximately USD 750 million of rated debt affected

Sao Paulo, July 10, 2012 -- Moody's Investors Service assigned a Baa3 global scale and Aaa.br national scale issuer ratings to both Raízen Energia and Raízen Combustíveis (collectively 'Raízen') and a Baa3 rating for the senior unsecured notes due 2014 of Raízen Combustíveis. At the same time, the rating of the senior unsecured notes due 2017, contributed by Cosan to Raízen Energia, was upgraded to Baa3 from Ba2, concluding the review that started on June 2011. The ratings outlook is stable. This is the first time Moody's has rated the two companies which are joint ventures formed by Cosan S.A. Indústria e Comércio (´Cosan´ rated Ba2/RUR-Up) and Royal Dutch Shell plc ('Shell' rated Aa1/Stable).

The following ratings were assigned:

Raízen Combustíveis:

Foreign currency issuer rating: Baa3

Brazilian National Scale Issuer Rating: Aaa.br

USD 350 million 9.500% senior unsecured notes due 2014: Baa3 (foreign currency)

Raízen Energia:

Foreign currency issuer rating: Baa3

Brazilian National Scale Issuer Rating: Aaa.br

USD 400 million 7.000% senior unsecured notes guaranteed by Raízen Combustíveis due 2017: Baa3 from Ba2 (foreign currency)

RATINGS RATIONALE

"The Baa3 ratings reflect Raízen's good credit metrics and solid positioning in both the upstream and downstream fuel businesses in Brazil", says Moody's analyst Marianna Waltz. In our view, while the sugar-ethanol operations provide the potential for higher margins and growth over the next several years, the fuel distribution segment is a source of stable financial performance and cash generation. The ratings also consider the companies' affiliation with and implicit support of Shell given the benefit derived from Shell's managerial expertise and the explicit support provided by both shareholders in the form of a USD 500mln backstop facility.

The ratings take into account the good medium-term prospects for the sugar-ethanol industry due to still-constrained global inventories supporting sugar and ethanol prices. Also incorporated in the ratings are Raízen´s many competitive advantages in the segment, such as its: large scale, concentration in the state of São Paulo and a highly developed logistics and distribution infrastructure. As for the downstream operations, the main positives are related to its large retail distribution network, as the third largest fuel distributor in Brazil with 23.3% of market share, and more than 4.5 thousand stations after the combination of the Shell and Esso chains. Raízen also benefits from the use of the Shell brand and products, especially the V-Power gasoline and Evolux Diesel.

Offsetting some of these positive attributes are the volatile nature of the sugar-ethanol business, which represents around two thirds of the company's EBITDA. In this sense, despite the favorable medium-term outlook and the company's above mentioned competitive advantages in the industry, external factors such as weather conditions and government incentives and policies can considerably affect prices and, consequently, impact the company´s financial performance.

In addition, although we view the expansion and renewal of sugarcane fields strategy as a way to achieve higher profitability, through reduction of idle capacity, fixed costs dilution and the increase in productivity, we also consider it as a risk to Raízen's credit profile given the large investments and potential for surplus supply. The company intends to grow its crushed sugarcane to 80 million tons by 2017, from 53 million tons as of the 2011/12 harvest, with a correspondent capital investment of about BRL 5 billion.

Despite the disparate nature of the two businesses, the ratings have been equalized at the same level due to the cross-guarantees to be provided by the JVs for each other's debt issuances. Currently, only Raízen Energia is benefiting from this mechanism, since the USD 350 million notes at Raízen Combustíveis are not guaranteed by Raizen Energia. Despite the lack of guarantee, the rating for these bonds was not notched down due to Raízen Combustíveis strong stand-alone credit profile and the integrated management of the two JVs. To the extent future debt at Raizen Combustiveis does not receive reciprocal guarantees from Raizen Energia its rating would likely be downgraded.

Furthermore, the companies are managed in a consolidated manner by one management team and with centralized treasury function. The oversight of the companies is conducted via a supervisory board comprised equally of representatives of Cosan and Shell. The ratings are supported by Shell´s implicit support Raízen constitutes a strategic long-term asset for Shell's global downstream portfolio, accounting for about 10% of the latter´s total capital employed in the segment, and its principal renewable energy platform. Accordingly, Raízen should benefit from Shell's operational experience and technology, as well as from a committed credit facility being structured by both Shell and Cosan that should provide emergency funding if and when needed.

The stable outlook incorporates expectations that the companies' expansion strategy in the upstream business and its dividend policy will be conducted in a prudent and conservative manner and not jeopardize its strong credit metrics. The company has an internal policy of keeping Net Debt/EBITDA at about 2 times over time. Moreover, it also considers that the shareholders will agree on dividend payouts commensurate with the company's financial performance.

The ratings could be upgraded if the company is able to execute its growth strategy, while maintaining cash from operations at current levels, total adjusted debt to EBITDA below 2.0x and an EBITA/interest expense of 6.5x or higher on a sustainable basis. Positive free cash flow generation or a stronger demonstration of support by Shell could also translate into considerations for positive rating momentum.

A downgrade could result from the inability to deliver at least mid-single digit organic growth rates and maintain current EBITDA margins. In addition, debt/EBITDA above 3.0x, EBITA/interest expense of 5.0x or less and CFO/net debt below 30% on a sustained basis could trigger a downgrade. A deterioration in its liquidity profile could also prompt a negative rating action.

The principal methodology used in rating Raízen was the Global Food - Protein and Agriculture Industry Methodology published in September 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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 relative risks. NSRs differ from Moody's global scale 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 ".br" for Brazil. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in March 2011 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

Headquartered in São Paulo, Raízen represents two effectively 50-50% joint-ventures formed by Cosan S.A. Industria e Comércio (rated Ba2/RuR-Up) and Shell Brazil Holdings BV (a 100% subsidiary of Royal Dutch Shell plc) -- operating with two legal entities, one (Raízen Energia S.A.) in the sugar and ethanol business and the other (Raízen Combustíveis S.A.) in the fuel distribution and sale. The combined companies would generate pro-forma revenues of roughly BRL 45 billion in the fiscal year of 2012.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

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

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.

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

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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

Please see ratings tab on the issuer/entity page on www.moodys.com 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 for further information.

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

Marianna Waltz, CFA
Asst Vice President - 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
SUBSCRIBERS: 55-11-3043-7300

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 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
SUBSCRIBERS: 55-11-3043-7300

Moody's assigns Baa3/Aaa.br to Raízen; outlook stable
No Related Data.

 

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