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Rating Action:

Moody's rates B2/A2.ar Sullair's bank credit facilities. Outlook is stable

 The document has been translated in other languages

25 Feb 2011

Buenos Aires, February 25, 2011 -- Moody's has affirmed Sullair's B2 local currency corporate family rating and A2.ar Argentine national scale rating. At the same time, Moody's has assigned ratings of B2/A2.ar to Sullair's Ar$60 million loan from Banco de la Nación Argentina (BNA; not rated). All of these ratings are local currency ratings, and the outlook on all the ratings is stable.

RATINGS RATIONALE

The B2 local currency corporate family rating and A2.ar Argentine national scale rating are supported by Sullair's solid franchise and long track record in the equipment rental market in Argentina, as well as by its growing business in Brazil. Sullair's long-established commercial relationship with its main suppliers also supports the company's business model and ratings. Finally, the ratings take into account the fact that Sullair's credit metrics are much stronger than those of other B rated companies in the equipment rental industry.

The ratings are constrained mainly by Sullair's fragile liquidity position, which results from its high exposure to short-term debt and little cash on its balance sheet. Other constraining factors include the company's small scale, limited geographic diversification, and exposure to Argentine credit risk. While Sullair's core business continues to be equipment rental and distribution, power generation accounts for 27% of total revenues. Power generation revenues rely mainly on contracts (Energía Distribuida) with ENARSA, an arm of the Argentine government; Sullair is therefore exposed to Argentine government (rated B3/Stable) credit risk.

Sullair's B2 local currency corporate family rating reflects its global default and loss expectation, while the A2.ar national scale rating reflects its credit quality in relation to that of domestic peers.

Issuers or issues rated A2.ar present above-average creditworthiness relative to other domestic issuers.

Moody's national scale ratings are intended as comparative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate risks. National scale ratings differ from Moody's global scale ratings in that they are not comparable with the full universe of Moody's-rated entities, but only with the national scale ratings of other rated debt issues and issuers in the same country. National scale ratings are followed by a modifier that signifies the relevant country, as in ".ar" for Argentina. For further information on Moody's national scale ratings, please refer to "Mapping Moody's National Scale Ratings to Global Scale Ratings," published August 2010.

Liquidity

Historically Sullair has had a high proportion of short-term debt and little cash on its balance sheet. As the same time, like most Argentine companies, it does not maintain committed credit facilities. Although in recent years Sullair has entered into bank loans that have final maturities beyond a year (24--30 months), the relatively short-term amortization profile of its debt does not enhance its liquidity profile.

Sullair also relies on financing from suppliers, which is less volatile than bank financing and helps offset its weak liquidity position. Strong internal cash generation is also an important offsetting factor. We note, however that Sullair's combination of little cash on hand and short term debt concentration results in an elevated level of financial risk.

The stable outlook assumes that Sullair will continue to develop its business model while maintaining strong credit metrics for its rating category. It also reflects our expectation that the company will maintain access to supplier financing and successfully renew or refinance its short-term bank debt. Finally, the stable outlook takes into account our expectation that Sullair will maintain its prudent financial policy with respect to dividends.

Given Sullair's tight liquidity profile, a rating upgrade is unlikely in the short term. Nevertheless, Sullair's current ratings or outlook could be revised upward if there were a substantial improvement in the company's liquidity profile, together with an increase in its revenue base, while maintaining diversification and manageable exposure to Argentine government credit risk. Quantitatively, an upgrade would require that the ratio of cash to short-term debt be maintained above 50% (10% as of September, 2010), adjusted total debt to EBITDA at less than 1.5 times (1.9x as of September, 2010), and interest coverage (EBIT/Interest) above 3.0 times (2.4x as of September).

The ratings or outlook could come under downward pressure if the recovery in the regional economy unexpectedly ends and Sullair is unable to quickly reduce its operations, investments, and leverage. A downgrade could also result from increased exposure to Argentine government credit risk through the company's power generation business or from a lack of timely payments on its existing contracts in this business.

Quantitatively, Sullair's rating could come under downward pressure if its debt to EBITDA ratio moves above 3.0 times, if its EBIT to interest expense drops below 1.5 times, or if its exposure to Argentine government risk rises above 30% of total revenues.

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 2010 annual revenues of approximately USD 270 million, Sullair is estimated to be one of the larger fleets in the region, with almost 4,000 equipment units operating in the region.

REGULATORY DISCLOSURES

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

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

Buenos Aires
Daniela Cuan
Senior Analyst
Corporate Finance Group
Moody's Latin America, Calificadora de Riesgo
JOURNALISTS: (800) 666 -3506
SUBSCRIBERS: (5411) 4816-2332

New York
Glenn B. Eckert
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Latin America, Calificadora de Riesgo
Cerrito 1186, 11th fl
Buenos Aires C1010AAX
Argentina
JOURNALISTS: (800) 666 -3506
SUBSCRIBERS: (5411) 4816-2332

Moody's rates B2/A2.ar Sullair's bank credit facilities. Outlook is stable
No Related Data.
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