Approximately BRL 200 million of Debt Securities Affected
Sao Paulo, March 10, 2011 -- Moody's América Latina has upgraded the ratings for Localiza Rent
a Car S.A. ("Localiza")'s senior unsecured
debentures to Baa3 from Ba1. At the same time Localiza's
corporate family ratings ("CFR") of Ba1/Aa2.br were
withdrawn. The outlook for the ratings is stable.
- BRL 200 million senior unsecured debentures due 2014: to
Baa3/Aa1.br from Ba1/Aa2.br
-Corporate family rating ("CFR"): Ba1/Aa2.br
"Localiza's upgrade to Baa3 is supported by the company's
stable operating performance and resilient business model demonstrated
during the credit crisis in 2009. During the downturn the company
sustained its strong margins and increased its liquidity by depleting
its fleet. Strong and growing market share position both in the
car and fleet rental segments that leave the closest competitor with less
than half of its market share also support the upgrade. The company
continues to maintain profitability and leverage metrics that are comparable
to most other Baa3 rated companies in the region.",
said Moody's analyst Marcos Schmidt. "The upgrade is
also related to the good economic prospects for Brazil that are increasing
access to bank loans, level of income and demand for cars maintaining
the good momentum for Localiza's business.",
On the other hand Localiza's ratings are constrained by the capital
intensive nature of the car rental business, small size when compared
to its global industry peers, lack of significant international
footprint, declining margins, low interest coverage for the
rating category when compared to peers given high interest rates in Brazil,
dependence on the negotiation of attractive discounts from automobile
manufacturers and reliance on the used cars sales market.
Localiza's Baa3 rating is also based on the company's ability to maintain
the utilization rate of its car rental fleet (69.1% in 2010
vs. 68.8% in 2009 and 67.9% in 2008)
and the average age of its car rental fleet business below one year (6.3
months in 2010 vs. 9.5 in 2009) through the successful management
of its vehicle purchases and sales through its own 55 used vehicle stores.
A key factor for Localiza's rating is therefore its ability to continue
to negotiate attractive discounts from automobile manufacturers,
while managing its used car operations in an efficient and timely manner,
thus allowing the company to maintain low depreciation expense.
Localiza's size as the largest car rental company in Brazil and
the largest single car buyer in the country gives the company strong bargaining
power. They have been acquiring vehicles straight from the manufacturers
for a 20% discount on average. The ability of the car manufacturers
to offer discounts to rental companies is also premised on lower taxes
paid by the manufacturer when selling new cars straight to the final consumers.
Localiza's used car operation is competitive against new car sales
due in part to this discount obtained in the acquisition of new vehicles.
Moody's regards Localiza as having a good level of transparency and financial
disclosure standards, as demonstrated by its quarterly publication
of audited financials in Brazilian GAAP and annually in US GAAP and going
forward will report on an IFRS standard. The company hosts regular
quarterly conference calls. The company's shares are traded on
BM&FBovespa complying with the Novo Mercado standards, the highest
corporate governance level in the local market.
Localiza has a board of directors comprised of nine members, with
four independent members. All directors must hold Localiza shares
and are elected during the annual general shareholders' meeting for a
two year term. Additionally, the company has a permanent
audit committee comprised of two members, with one independent members.
Three other committees were created by the board as part of Localiza's
corporate governance best practices.
In 2010 Localiza achieved BRL 2.5 billion in net revenues a 37.4%
increase when compared to 2009, the revenue growth was due to a
33.1% increase in number of daily rentals and a 3.6%
increase in average rental rate in the car rental division, combined
with a 13.3% increase in the number of daily rentals and
5.5% growth in the average rental rate in the fleet rental
At the end of 2010 Localiza had BRL 415.7 million in cash and equivalents
on its balance sheet, enough to pay down 100% of its short
term debt of BRL 233.7 million. If the short term debt was
paid down with its cash balance the company would have a comfortable debt
maturity schedule with no further debt repayments during 2011 and relatively
moderate amounts in 2012 and 2013.
Localiza's 100% unencumbered fleet of 88,060 cars with
an estimated value of BRL 2.4 billion, is a source of alternative
liquidity. During the economic slowdown especially during the 1H'09
the company was able to sell 15,107 cars and reduced purchases to
5,333 cars. The cars were sold with no major discount to
the market through Localiza's used car stores network. The
company generated BRL 465 million FCF in the period and paid down the
upcoming debt maturities.
Localiza's cash balance of BRL 415.7 million plus BRL 2.4
billion in fleet value would cover its total adjusted debt of around BRL
1.9 billion by around 1.5 times.
The stable outlook assumes that Localiza will continue to successfully
execute its growth strategy with access to the capital markets,
always adjusting its fleet size to expected market conditions on a timely
Although unlikely based on Localiza's current size and geographic
footprint, upward pressure on Localiza's current rating or outlook
would further gains in market share, geographic diversification
and revenues while maintaining Gross Debt to EBITDA below 2.25
times (2.5 times in the last twelve months ended in September,
2010) and achieving EBITDA to interest expense coverage of above 5.0
times (4.0 times in the last twelve months ended in September,
2010). The implementation of financial policies that included maximum
leverage and minimum cash amounts, a long-term committed
bank standby facility that would reduce reliance on capital markets to
refinance existing debt maturities, would also be considered as
an enhancement to the company's liquidity profile and overall credit quality.
Conversely, negative pressure on the current outlook or ratings
could arise if Localiza fails to reduce its fleet size during a major
downturn in the Brazilian car rental market. Quantitatively,
Localiza's rating could come under downward pressure if EBITDA margins
for its fleet management and car rental business were to fall below 45%
(51.1% in the last twelve months ended in September,
2010), EBITDA interest coverage to below 3.0 times (4.0
times in the last twelve months ended in September, 2010) or if
Gross Debt to EBITDA exceeded 3.5 times (2.5 times in the
last twelve months ended in September, 2010) on a sustained basis.
The principal methodology used in this rating was Global Equipment and
Automobile Rental Industry published in December 2010.
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 Implementation Guidance
published in August 2010 entitled "Mapping Moody's National Scale
Ratings to Global Scale Ratings."
Localiza, founded in 1973 and headquartered in Belo Horizonte,
Minas Gerais, Brazil, operates car rental, fleet management,
and used car businesses in Brazil. It also franchises rental car
operations throughout Latin America. As of December 31, 2010,
Localiza had a total fleet of 88,060 company-owned cars and
476 car rental locations (415 in Brazil, with 234 company-owned)
in eight countries. Localiza is the market leader in Brazil in
each of the car rental lines of business, including replacement
and fleet management markets, and also has the largest number of
car rental locations at the principal Brazilian airports.
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
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Please see ratings tab on the issuer/entity page on Moodys.com
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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 upgrades Localiza to Baa3/Aa1.br
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