New York, October 29, 2021 -- Moody's Investors Service ("Moody's") has today
downgraded to B1 from Ba3 Hidrovias do Brasil S.A.(HBSA)'s
corporate family rating and the senior unsecured ratings of the notes
issued by Hidrovias International Finance S.a.r.l.
due 2025 and 2031 and fully and unconditionally guaranteed by HBSA and
its fully-owned subsidiaries, except for the bauxite operations
subsidiaries (guarantor group). The outlook for the ratings is
stable.
Ratings downgraded:
Hidrovias do Brasil S.A.
- Corporate Family Rating: to B1 from Ba3
Hidrovias International Finance S.a.r.l.
- 5.9500% Gtd senior unsecured notes due 2025:
to B1 from Ba3
- 4.9500% Gtd senior unsecured notes due 2031:
to B1 from Ba3
The outlook for the ratings is stable.
RATINGS RATIONALE
The downgrade of HBSA's ratings to B1 follows the company's announcement
on October 18th that it will raise BRL380 million in new incentivized
infrastructure debentures to fund investments at the STS20 terminal at
the Santos port, which will further delay HBSA's deleveraging
plans. The new debt adds to several setbacks HBSA faced in the
past few years that resulted into leverage falling behind Moody's
initial expectations, including (i) the renegotiation of short-term
take-or-pay volumes with COFCO in 2019-20; (ii)
a contract cancellation with Mitsui in 2018; and (iii) a severe drought
in 2021 that is impairing river navigability in the company's southern
operations and reducing spot volumes due to lower crop output in the northern
operations. With the new debt issuance, HBSA's adjusted
gross leverage will hover around 4x-5x in 2022-24,
compared to previous expectations of 3x-4x prior to the issuance.
In 2021, the company's gross leverage will remain atypically
high at 6x-6.5x, reflecting lower EBITDA coming from
operational issues caused by the drought and the impact of the sharp depreciation
of the Brazilian real in the company's unhedged foreign currency
debt.
HBSA's credit metrics will improve from the 2021 trough in the next few
years as the company benefits from the new contracts (namely the Santos
port and salt contracts), ramp-up of the existing take-or-pay
contracts, the additional EBITDA from the Imperial acquisition and
additional spot volumes from the solid medium-term growth prospects
of the northern operation, which will more than compensate for the
volume lost with the Mitsui contract cancellation. However,
until the company can increase EBITDA and generate positive free cash
flow sustainably, leverage will remain high and execution risks
on its expansion investments will heighten. HBSA's expansion
plans include BRL2.6-3 billion in total investments until
2025, of which BRL900 million-BRL1 billion will be spent
in 2021. With the downward revision of the company's EBITDA
guidance to BRL630-710 million in 2021 from BRL800-880 million,
the cash flow gap that HBSA will need to bridge to fund investments with
internal or external liquidity sources increased.
The cancellation of the contract with Mitsui slowed HBSA's deleveraging
process, but also brought BRL388 million in proceeds from the legal
compensation for the cancellation that were sitting in the HBSA's cash
position. In April 2021, HBSA announced the $85 million
(BRL484 million) acquisition of some of Imperial Logistics International
B.V. & Co. KG ("Imperial")'s
Paraguayan navigation assets, which reduced its cash position to
BRL534 million at the end of second quarter of 2021 from BRL1.2
billion at the end of the first quarter. Accordingly, HBSA's
liquidity cushion to cover expansion capex diminished and net leverage
ratios -- which served as a mitigant to the company's high
gross leverage -- deteriorated.
HBSA's B1 ratings continue to be supported by the company's solid
business model, with about 70% of its revenue and EBITDA
ensured by long-term take-or-pay agreements with
strong off-takers. The agreements contain minimum volume
guarantees and cost pass-through clauses, which translate
into predictable cash flow, high capacity utilization rates and
high operating margins for the company. Moody's estimates
that the existing agreements will bring around BRL6.5 billion in
EBITDA from 2021 until 2030, sufficient to cover the company's total
debt by 1.5x (pro forma for the new issuance), and five out
of the seven existing contracts — all except HBSA's take-or-pay
agreements with COFCO and Sodrugestvo in the south — will remain
valid during most of the tenor of the notes, maturing after 2029.
The positive long-term outlook for agricultural production and
waterborne transportation in Brazil and Paraguay, and the strategic
location of HBSA's operations also support the ratings. The ratings
also incorporate HBSA's good liquidity profile and Moody's expectation
that HBSA's credit metrics will gradually improve from 2021's trough
with the normalization of river navigability and ramp-up of northern
operations and new contracts.
The ratings are constrained by the company's current high gross leverage
and delays in deleverage over the past few years, short track record
of operations and its small size relative to its rated peers. The
high degree of product and geographic concentration also constrains the
ratings because it exposes the company to adverse weather conditions that
could limit agricultural production and river navigability. There
is also a high degree of client concentration, although clients'
good credit quality and history of contract compliance mitigate any related
risk. Finally, given that the totality of HBSA's debt is
indexed to the US dollar, the company's gross leverage ratios are
exposed to currency volatility risk.
LIQUIDITY
HBSA has a good liquidity profile, with BRL534 million in cash at
the end of June 2021, well above its minimum requirements of around
BRL300 million, and only around BRL50-60 million in principal
debt maturities per year over the next four years. Pro forma to
the new issuance, the existing cash will continue to cover debt
maturities through 2025, as the new debentures will be amortized
from 2028 onwards. In Moody's view, HBSA's cash position
and comfortable debt amortization schedule are key to mitigate operational
and execution risks on investments, and support the company's credit
quality as long as HBSA maintains a certain degree of financial discipline.
RATING OUTLOOK
The stable outlook incorporates Moody's expectations that HBSA's
credit metrics will gradually improve with operations performing in line
with the terms and conditions established by the existing take-or-pay
agreements, and that the company will prudently manage its dividend
distribution and future investments to preserve its good liquidity profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of HBSA's ratings could occur if the company is able
to reduce leverage sustainably, while maintaining its current business
model and profitability levels and generating stable cash flows on a sustained
basis. Quantitatively, a rating upgrade would require the
maintenance of adjusted leverage (measured as debt/EBITDA) sustainably
below 4x and interest coverage (measured by adjusted FFO + interest/interest)
above 3.5x. The maintenance of a strong liquidity profile
would also be necessary for an upgrade.
The ratings could be downgraded if HBSA's operating performance remains
weak, such that leverage remains high and liquidity deteriorates
without prospects for improvement. A deterioration in the company's
business profile because of the loss of any existing take-or-pay
agreement without a financial compensation or further debt-financed
expansions into the spot market would also put negative pressure on the
ratings. Quantitatively, a downgrade could occur if leverage
remains sustainably above 5x and interest coverage below 2x. A
deterioration in the company's liquidity profile, stemming from
large shareholder distribution or more aggressive financial policies,
would also result in a downgrade of the ratings.
The principal methodology used in these ratings was Shipping published
in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276306.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
COMPANY PROFILE
Headquartered in Sao Paulo, Brazil, HBSA is South America's
largest independent provider of integrated logistics focused on waterway
transportation. The company's operations include shipping,
transshipment, storage and port services for dry bulk cargo,
including grains, iron ore, bauxite, fertilizers and
pulp in the Paraná-Paraguay waterway and Amazon river systems.
For the 12 months ended June 2021, the company generated BRL1.5
billion ($282 million) in revenue with an adjusted EBITDA margin
of 43.9%, coming mainly from shipping activities (80%
of total) and other logistics services (20%). The company's
Northern operations, which comprise mainly the transportation of
grains represent around 56% of the company's total EBITDA,
followed by the Southern operations (35%) and the Coastal Navigation
operations (17%), which relate mainly to iron ore and bauxite
transportation, respectively. Around 60% of the company's
total revenue is generated in Brazil, with the remaining 40%
generated through hard currency contracts in Paraguay and Uruguay.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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same series, category/class of debt, security or pursuant
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support provider and in relation to each particular credit rating action
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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
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and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, 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
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The Global Scale Credit Rating on this Credit Rating Announcement was
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Carolina Chimenti
Vice President - Senior Analyst
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653
Marcos Schmidt
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653
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