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Rating Action:

Moody's upgrades Localiza to Baa3/Aa1.br

Global Credit Research - 10 Mar 2011

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 At the same time Localiza's corporate family ratings ("CFR") of Ba1/Aa2.br were withdrawn.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.

Ratings Upgraded:

- BRL 200 million senior unsecured debentures due 2014: to Baa3/Aa1.br from Ba1/Aa2.br

Ratings Withdrawn:

-Corporate family rating ("CFR"): Ba1/Aa2.br

RATINGS RATIONALE

"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.", added Schmidt.

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 division.

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 basis.

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.

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, 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 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
Marcos Schmidt
Analyst
Corporate Finance Group
Moody's America Latina Ltda.
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

New York
Brian Oak
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
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SUBSCRIBERS: 212-553-1653

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Moody's upgrades Localiza to Baa3/Aa1.br
No Related Data.
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