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Rating Action:

Moody's assigns a Aa2.br rating to Rodoanel Oeste's debentures guaranteed by CCR; outlook stable

 The document has been translated in other languages

06 Apr 2011

Approximately BRL2.0 billion of debt instruments rated

Sao Paulo, April 06, 2011 -- Moody's America Latina (Moody's) assigned Issuer Ratings of Ba1 on the global scale and Aa2.br on the Brazilian national scale to CCR S.A (CCR). At the same time, Moody's assigned a Ba1 local currency rating on the global scale and Aa2.br rating on the Brazilian national scale to up to BRL2.0 billion in senior unsecured debentures to be issued by Concessionária Rodoanel Oeste S.A. (Rodoanel Oeste), which are 95% guaranteed by CCR and 5% guaranteed by Encalso Construções LTDA. (Encalso). The outlook is stable for all the ratings. This is the first time Moody's has assigned ratings to CCR.

The debentures will be issued in three series with maturity dates in three, four and five years. These issues are being offered under CVM's Regulation 476 with a firm underwriting commitment for up to BRL1.75 billion from the arranging banks HSBC and Bradesco BBI. The proceeds will be used to replace more expensive debt outstanding in the balance sheet of Rodoanel Oeste and eliminate its foreign currency debt exposure.

Ratings Assigned:

Issuer: CCR S.A. (CCR)

Issuer Ratings: Ba1/Aa2.br

Issuer: Concessionária Rodoanel Oeste S.A. (Rodoanel Oeste)

....up to BRL1.25 billion senior unsecured debentures guaranteed by CCR due in three and four years: Ba1 / Aa2.br

.BRL750 million senior unsecured debentures guaranteed by CCR due in five years: Ba1 / Aa2.br

RATINGS RATIONALE

The Ba1/Aa2.br issuer rating of CCR reflects its parent company position of one of Brazil's largest toll-road concession groups which Moody's view as an investment grade on a consolidated basis. It holds a diversified portfolio of long-term operating toll road concessions that are strategically located in some of the most well-developed and economically robust regions of the country. "The ratings consider the mature nature of the majority of CCR's concessions, evidenced by a solid track record of toll traffic that has generated high operating margins and predictable cash flows", said Moody's Analyst Cristiane Spercel. "The ratings also consider its experienced management team, which has been developing constructive relationships with the regulatory authorities for its concessions." CCR's above-average corporate governance practices further support the ratings.

Nevertheless, CCR's ambitious investment strategy and track record of high dividend payments to shareholders could negatively impact the ratings. In Moody's opinion, CCR has shown a willingness to pursue strategic corporate activities in the Brazilian infrastructure sector that would cause a leverage increase. Although CCR has so far demonstrated a moderate appetite for risk and consistent financial discipline, Moody's remains concerned that additional investments could lead to a deterioration in the company's already tight liquidity profile and further borrowing needs when capital markets are not necessarily favorable.

The Ba1/Aa2.br ratings assigned to the Rodoanel Oeste's proposed BRL2.0 billion senior unsecured debentures reflect the support of a corporate guarantee from CCR. The indenture that documents the debentures does not have provisions for a debt service reserve account to ensure a timely payment in the event of Rodoanel Oeste' default. Nevertheless, the documentation related to the CCR guarantee provides adequate assurance of the validity and binding nature of the guarantee. While a late payment could result in a default event, the ratings on the debentures reflect the low probability of loss because of the expected payment by a Ba1/Aa2.br rated guarantor.

On a consolidated basis, CCR's credit metrics reflect an investment grade profile commensurate with a Baa3 rating. The issuer ratings and the ratings assigned to CCR's guaranteed debentures are rated one notch lower to reflect the structural subordination of obligations at the level of CCR holding company to other debt at the level of its operating companies. The CCR holding company largely depends on the regular upstreaming of dividends from its operating subsidiaries to meet its own obligations, including debt service, equity investment commitments and eventual cash requirements related to its guarantees.

Despite the important role that Rodoanel Oestes fills as a segment of a ring road connecting the main routes in the west metropolitan area of Sao Paulo and the relatively stable regulatory environment for toll road concessions in the State of Sao Paulo, its credit profile is weak as a result of its insufficient cash flow generation to service its debt in the short to medium term.

The tighter economic conditions that constrained Brazilian GDP growth in 2009 significantly impaired the traffic volumes at Rodoanel Oeste. The opening of the Rodoanel South section in April 2010 coupled with municipal restrictions on commercial vehicles on Rodoanel's untolled competing routes (i.e., Marginal Pinheiros, Bandeirantes and Roberto Marinho Avenues), contributed to traffic volumes recovering last year. In spite of these gains, Moody's estimates that current traffic volumes at Rodoanel Oeste are still 20% below the initial forecast, which will delay the project's breakeven point.

Obtaining long-term financing for this project in the middle of the global liquidity crunch was also a challenge. The bridge loans that supported the initial concession fee payments were refinanced only by the end of 2009, when Rodoanel Oeste successfully closed USD500 million (about BRL870 million) long-term loans with the Inter-American Development Bank (IDB) and the Japan bank for International Cooperation (JBIC). At the same time, it issued 3-year BRL750 million debentures in the local market.

Shareholders have provided Rodoanel Oeste with its remaining funding requirements. Until December 31, 2010, they had made equity injections of BRL200 million and timely intercompany loans amounting to BRL741 million. While acknowledging the financial support provided by the shareholders, Moody's sees the strategy of relying on intercompany loans as a credit negative for Rodoanel Oeste given the lack of ring-fencing provisions to enforce the subordination of these intercompany loans to other debts of the concessionaire. Since this concession is not expected to generate positive free cash flows to support any dividend distributions or reductions in the intercompany loans during the next 5 years, Moody's estimates that Rodoanel Oeste's will require another BRL400 million from the shareholders to support its cash needs during this period, including debt service on the proposed debentures. Further support from the shareholders may be required for the take out of the proposed debentures at maturity if the capital markets are not favorable.

Moody's is confident that CCR will continue to support Rodoanel Oeste on a timely basis given the strategic importance of this asset to its portfolio of concessions in the state of Sao Paulo and the existing cross-default provisions embedded in several other debt arrangements within the group.

The CCR group has a strong track record of sizeable investments that include participating in auctions for new concessions and acquiring operating companies. For example, it acquired Rodovias Integradas do Oeste S/A, a 516- kilometer concession in the state of Sao Paulo, for approximately BRL1.3 billion in October 2010. Notwithstanding its strategy of pursuing opportunistic investments in the transportation industry, CCR has historically behaved like a prudent investor, only seeking new ventures that present an expectation of a reasonable rate of return. This is evidenced by the company's strong consolidated credit metrics for the rating category, including an average Funds From Operations (FFO) to debt ratio of 16.5% for the last three years and an interest coverage ratio higher than 3.2x during the same period. The financial covenants embedded in the debentures largely limit additional leverage on a consolidated basis. The covenants require the net-debt-to-EBITDA ratio to be lower than 4.0 times and the EBITDA-to-net-interest expenses higher than 2.0 times.

On a consolidated basis, CCR has a tight liquidity position that is not typical of investment grade companies, as shown by BRL2.3 billion in short-term debt (including Moody's standard adjustments for concession liabilities and refinanced taxes) vis-à-vis a cash position of BRL1.2 billion as of December 31, 2010. The refinancing risk however, is largely mitigated by CCR's strong operating cash generation from essential public infrastructure assets, which has been in the range of BRL1.3 billion to BRL1.6 billion per year. Additionally, CCR's access to the local banking and capital markets has been resilient supported by an experienced management team and relatively high corporate governance standards as compared to local peers. The BRL1.2 billion equity offer in October 2009 is an additional example supporting this resilience.

As a holding company, dividends from operating subsidiaries are CCR' primary source of liquidity. Other sources of cash include intercompany revenues from administrative, financial and engineering service agreements with the affiliates. In 2009 and 2010, the operating toll concessions distributed approximately BRL790 million in dividends to the parent company each year. Moody's notes that the debt service at the level of these operating subsidiaries constrain these dividends. Debt at the level of these subsidiaries represent about 88% of CCR's consolidated debt. Even so, Moody's consider these dividends a reliable source of cash given the mature concession profile of the operating toll roads. For the next few years, Moody's foresees that the annual flow of dividends and intercompany revenues from the operating subsidiaries will cover CCR's overhead expenses and payments for debt service. Additional debt may be required to support new investments and high dividend distributions.

The stable outlook reflects Moody's opinion that CCR will continue to show strong credit fundamentals, which will be boosted by expected growth in the Brazilian GDP. Moody's expects that dividend payments as well as additional investments will be prudently managed so that CCR's consolidated credit metrics remain within the current rating category while the current barely adequate liquidity position is preserved or strengthen. Moody's expects the credit profile of Rodoanel will remain weak over the next several years and thus the company will likely continue to rely on the timely and strong financial support of its shareholders.

The rating or outlook could be upgraded if CCR were to steadily improve its liquidity profile and produce consolidated credit metrics that exceed historical performance so that the FFO to debt ratio stays above 25% and interest coverage stays above 3.5x on a sustainable basis.

The rating or the outlook could be downgraded if there is a deterioration in CCR's liquidity position or a significant and sustained deterioration in its consolidated credit metrics so that FFO to debt ratio falls below 15% and interest coverage ratio remains below 2.5x for an extended period of time. A perception of deterioration in the level of support from the shareholders to Rodoanel Oeste could also trigger a downgrade of the rated debentures.

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 (GSR) 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 Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings"

The principal methodology used in rating CCR was the Operational Toll Roads rating methodology published in December 2006.

Concessionaria do Rodoanel Oeste S.A. (Rodoanel Oeste) holds a 30 year concession to operate the toll road service of the West section of Rodoanel Mário Covas, a 32 kilometer concession in the State of Sao Paulo, which the state regulatory agency, Agência Reguladora de Serviços Públicos Delegados de Transporte (ARTESP), granted in June 2008. Built in 2002, the Rodoanel Oeste is a 32-kilometer section of the ring road surrounding the metropolitan area of Sao Paulo that connects some of the most important highways in the State, such as Rodovia dos Bandeirantes, Rodovia Anhanguera, Rodovia Castello Branco, Rodovia Raposo Tavares (all CCR's subsidiaries) and Rodovia Regis Bittencourt.

Rodoanel Oeste is an operating subsidiary of CCR S.A. (CCR), one of Brazil's largest toll-road concession groups, which controls approximately 2,093 kilometers of toll road concessions. CCR was created in 1998 and currently controls eight toll-road concessions in the states of Sao Paulo, Rio de Janeiro and Parana, with terms ranging from 2015 to 2038. CCR also owns Actua and Engelog, companies that perform operating and maintenance services for its highway networks. In addition, CCR Group participates with minority interests in Renovias, ViaQuatro, Controlar and STP. CCR's consolidated net revenues, adjusted to exclude the IFRS construction revenues, attained BRL3.7 billion (USD2.1 billion) and an EBITDA of BRL 2.4 billion (USD1.4 billion) in 2010, of which Rodoanel Oeste accounted for 4% and 2%, respectively.

REGULATORY DISCLOSURES

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 Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning 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.

Sao Paulo
Cristiane Spercel
Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

New York
Chee Mee Hu
MD - Project Finance
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's America Latina Ltda.
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16th Floor, Room 1601
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SUBSCRIBERS: 55-11-3043-7300

Moody's assigns a Aa2.br rating to Rodoanel Oeste's debentures guaranteed by CCR; outlook stable
No Related Data.
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