Approximately USD 250 million in debt securities affected
Sao Paulo, January 12, 2011 -- Moody's Investors Service has assigned first-time B3 corporate
family rating to Agropecuária Nossa Senhora do Carmo S.A.
("Virgolino") and B3 to its proposed USD 250 million 7-year
senior unsecured notes issued by its Cayman Island based offshore subsidiary,
Virgolino de Oliveira Finance Limited, with an unconditional guarantee
from Agropecuária Nossa Senhora do Carmo S.A.,
and its subsidiaries Virgolino de Oliveira S.A. Açúcar
e Álcool, (" Virgolino de Oliveira"), Açucareira
Virgolino de Oliveira S.A. ("Açucareira Virgolino"),
and Agropecuária Terras Novas S.A. ("Agropecuária
Terras Novas"). The outlook for both ratings is stable.
The B3 rating reflects Virgolino's enhanced operating performance
boosted by the partnership with Copersucar, as well as the lengthened
debt profile after the proposed issuance that would be more in line with
company's operating cash generation. This is the first time
Moody's has rated Virgolino.
"Despite the volatile nature of the sugar and ethanol industry and
the susceptibility of its earnings to currency fluctuations, the
profitability and cash flow of Virgolino's operations improved in
the fiscal year end 2009/2010 (April/2010) as a result of significant
operating efficiencies after the startup of two newest sugar and ethanol
plants José Bonifácio, initiated in 2006 and Monções
in 2008, still high international sugar prices and the absence of
non-recurring events, including the cost of a new energy
generator in the previous year", says Ricardo Kovacs,
a Moody's Vice President and lead analyst for Virgolino.
The positive trend with respect to sugar prices was evidenced in Virgolino's
2Q11 increased revenues. The company also benefited from the flexible
product mix between sugar and ethanol segments that allows management
to shift mix of its 12 million tons of crushing capacity between 40%
and 60% depending on the prevailing market conditions. Moody's
expect Virgolino's sugar and ethanol businesses to deliver more
stable earnings once all four production units anticipate elevated capacity
utilization given expectations that demand for sugar and ethanol would
remain higher than supply over the next 12 months, with lower global
inventory levels and international prices trending above historical averages.
"The completion of the USD 250 million issuance is key to align
Virgolino's debt maturity schedule to current cash flow generation
level", says Ricardo, adding that "Moody's
expects further efforts from the management to deleverage its balance
sheet over the next 18 months and on cost reduction efforts in order to
better manage the segment's volatility without damaging future cash
The company currently has only four operating mills: (Itapira with
1.7 million tons of crushing capacity; Catanduva -- 4.2
million tons; José Bonifácio -- 3.7 million
tons and Monções -- 2.4 million tons).
The concentration of operations in these four plants increases exposure
to event risks like accidents and labor strikes, which could cause
business interruptions and impact cash flow unexpectedly.
With 12 million tons of crushing capacity and approximately USD 600 million
of net revenues, Virgolino is significantly smaller in terms of
net revenues than its international rated peers Suedzucker (Baa2,
USD 8.1 bln), Tate&Lyle (Baa3, USD 5.5 bln)
and Tereos (Ba3, USD 4.3 billion), as well as its Brazilian
peer Cosan (rated Ba2, USD 8.8 bln), which has crushing
capacity of 62 million tons through 23 sugar-cane mills.
Virgolino's smaller size, however, is partially mitigated
by its ability to report higher operating margins than most of its peers.
Its EBITDA margin of 28.4% in FY 4/10(according to Moody's
standard adjustments) is somewhat higher than its international peers'
and compares favorably against its Brazilian peer, Cosan.
The company benefits from the significant cost advantages of operating
in one of the highest yielding sugar cane regions of the world.
Virgolino further benefits from its Copersucar exclusivity partnership
agreement which assures full acquisition of production and more stable
cash flow while allowing relatively lower transportation costs.
Virgolino's tight control over cost of production, and the
fact that 50% of its sugarcane is from its own or leased land from
its shareholders and third parties, and the remaining 50%
coming from third-parties with no concentration are also credit
A Corporate Family Rating is an opinion on the expected loss associated
with the debt obligations of a group of companies assuming that it had
one single class of debt and is a single consolidated legal entity.
Specific debt instruments for the same corporate family may be rated differently,
depending on their seniority and guarantors, as compared to other
debt instruments issued by the group.
The B3 rating assigned to the senior unsecured notes is at the same level
of Virgolino's corporate family rating given the limited amount
of secured debt in the capital structure. The company plans to
use the proceeds to prepay short term secured indebtedness as described
in the offering memorandum. Moody's has reviewed preliminary draft
legal documentation for the transaction. The rating assumes there
will be no material variation from the drafts reviewed and that all legal
agreements are legally valid, binding and enforceable.
The stable outlook reflects Moody's expectation that Virgolino's
management will remain focused on improving its debt maturity profile,
reduce leverage and improve cash flow metrics. In addition,
Moody's expects earnings to grow double digits in the 2011 fiscal
year due to the recent historical pickup in sugar prices, keeping
in mind the inherent volatility of commodity prices, and that excess
cash generation will be used to pay-down maturing debt.
Moody's expect Virgolino to remain free cash flow positive and maintain
conservative financial policies.
Positive pressure could develop if debt to EBITDA fell below 4.0x,
RCF to net debt was above 20% and EBITA to interest expense went
above 1.5x, on a sustained basis.
Negative pressure could develop on the rating if FCF went negative,
EBITA to interest expense fell below 1.0x and EBITDA margin was
reduced to below 20% on a sustainable basis. Although unlikely
in our view, if Virgolino were to leave Copersucar (Cooperative
of Sugarcane, Sugar and Alcohol Producers of the State of São
Paulo) for any reason, it would also pressure the rating.
The principal methodology used in this rating was Global Food -
Protein and Agriculture Industry published in September 2009.
Founded in the 1930's and based in São Paulo state,
Brazil, Virgolino is a family owned business still headed by the
founding Oliveira family. It operates in the sugar and ethanol
production through 4 production plants, all located in Sao Paulo
state, and posted BRL 1.0 billion revenues (approximately
USD 600 million) for the fiscal year ending April 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, and confidential and proprietary Moody's
Investors Service information.
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on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
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Vice President - Senior Analyst
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 assigns a B3 corporate family rating to Virgolino and to its proposed notes. Outlook is stable.
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