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Rating Action:

Moody's upgrades Raizen to Baa3; stable outlook

 The document has been translated in other languages

09 Dec 2020

Sao Paulo, December 09, 2020 -- Moody's America Latina, ("Moody's") has upgraded Raizen Energia S.A. global scale senior unsecured ratings to Baa3 from Ba1. The national scale senior unsecured Aaa.br ratings remained unchanged. At the same time, Moody's withdrew Raizen Combustiveis S.A. corporate family ratings and assigned Baa3/Aaa.br issuer ratings to Raizen Energia S.A. and Raizen Combustiveis S.A. The outlook for the ratings is stable.

The rating action follows Moody's change, on December 7, 2020, of Brazil´s Foreign Currency Country Ceiling to Baa2 from Ba1, with the update of the country ceilings methodology. The updated "Country Ceilings Methodology" replaces the methodology titled "Local and Foreign Currency Country Ceilings for Bonds and Other Obligations Methodology" published on November 25, 2019.

Ratings upgraded:

Issuer: Raízen Energia S.A.

Gtd senior notes due 2021 (guaranteed by Raízen Combustíveis S.A.): upgraded to Baa3 from Ba1

Rating assigned:

Issuer: Raízen Energia S.A.

Issuer rating: Baa3 (global scale) / Aaa.br (national scale)

Issuer: Raízen Combustiveis S.A.

Issuer rating: Baa3 (global scale) / Aaa.br (national scale)

Ratings withdrawn:

Issuer: Raízen Combustiveis S.A.

Corporate Family Rating: Ba1 (global scale) / Aaa.br (national scale)

Outlook Actions:

Issuer: Raízen Energia S.A.

Outlook, Stable

Issuer: Raízen Combustiveis S.A.

Outlook, Stable

RATINGS RATIONALE

Raizen's ratings are supported by its solid position in the sugar-ethanol and fuel distribution businesses in Brazil. In our view, while the sugar-ethanol production and marketing operations provide potential for higher margins, the fuel distribution segment is a source of stable operating performance and cash generation. The sugar-ethanol segment also provides the company with some insulation from Brazil's domestic consumption fundamentals because of its export-oriented nature. The ratings also take into consideration the existence of cross-guarantees between Raízen Energia and Raízen Combustíveis in all debt instruments issued and the companies' affiliation with and implicit support from Shell Brazil Holdings BV (a 100% subsidiary of Royal Dutch Shell Plc, rated Aa2 negative) and Cosan S.A. (Ba2 stable), given the benefit derived from Shell's brand and managerial expertise, the expertise and track record of Cosan in the local market as well as the explicit support provided by both shareholders in the form of a $700 million backstop facility.

The ratings are constrained by the volatile nature of its upstream business, representing 57% of the company's EBITDA in the 2019-20 harvest year. Although Raízen's relatively lower percentage of owned sugarcane when compared to peers could allow for less margin volatility in lower production years, the sugar-ethanol industry is highly dependent on external factors, such as weather conditions and government's incentives and policies, which can significantly affect prices and Raízen's financial performance. Moreover, leverage is currently high for the rating level, but we expect it to converge to below 3.5x gross leverage at a normalized level, past the negative impact of COVID, and higher EBITDA generation. The aggressive growth strategy is also a rating constraint, but we expect any future M&A to be undertaken in a way not to further pressure credit metrics. The rating is unlikely to stand more than two notches above Brazil's sovereign bond rating and it remains constrained by Brazil's foreign currency ceiling.

Raizen´s metrics have been negatively impacted the rapid and widening spread of the coronavirus outbreak early in 2020, leading to falling oil prices, lower fuel demand domestically in Brazil, and sharp BRL/USD depreciation. The combination of these factors led to a peak adjusted gross leverage of 4.98x in June 2020, but which we estimate to reduce to 4.17x by March 2021 and below 3.5x in March 2022. We expect the sugar-ethanol segment EBITDA to grow by 12.5% harvest-over-harvest in March 2021, benefitting from higher sugar prices and sustained producer ethanol prices. Still, Raizen consolidated EBITDA will post a 3.9% drop by March 2021 given the lower contribution of its fuel distribution segment to EBITDA. By March 2022 we expect consolidated EBITDA to increase 14.4% with the recovery in fuel distribution volumes and prices, sustained by higher international oil prices and normalized demand, as well as solid results from sugar-ethanol with attractive hedges already being made for sugar and sustained producer ethanol prices.

Raizen is now rated two notches above Brazil's sovereign rating of Ba2 and remains below Brazil's Foreign Currency Ceiling of Baa2. This is granted on an exceptional basis for companies with a credit profile stronger than that of the sovereign, combined with a relevant export component. In the case of Raizen, it considers its strong financial profile and resilient business model, which limits the impact of weak domestic economic fundamentals in the company's credit profile. Moreover, it also incorporates the export contribution of approximately 25% of its total EBITDA from its sugar-ethanol segment, and around 10% from fuel distribution abroad. Raizen also holds an estimated cash balance of BRL1.2 billion outside of Brazil and has access to committed lines.

The ratings also consider the existence of cross guarantees between Raízen Energia and Raízen Combustíveis in most debt instruments issued and the companies' affiliation with and support of Shell and Cosan, as well as the explicit support provided by both shareholders in the form of a $700 million backstop facility.

Raízen presents an adequate liquidity position. The company's storage capacity and above par financial flexibility allow it to hold most of its inventory during the year to be sold during January and March, the Brazilian off-harvest period. The inventory carry strategy increases working capital needs, but, despite that, Raízen closed September 2020 with a cash balance of BRL2.9 billion and readily marketable inventories of BRL5.2 billion valued at cost, with debt maturities in the short-term of BRL3.1 billion, including working capital lines. Raizen also holds a $300 million fully available committed facility maturing in April 2024, in addition to the $700 million committed backup facility provided by its shareholders, Shell and Cosan. Although maintenance capex is high and could pressure future free cash flow generation, the company has the flexibility to reduce dividend payments to preserve liquidity. In 2020-21, because of coronavirus (COVID-19) market instability, Raizen will not distribute dividends reinforcing its cash balance at the end of the harvest.

The stable outlook incorporates our expectations that the company will improve its credit metrics through 2021, while maintaining adequate liquidity, and that its dividend policy will be conducted in a prudent and conservative manner. We also incorporate that future M&A will not lead to a deterioration in credit metrics.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade on Raízen's rating is unlikely in the near-term. Quantitatively, it would require total adjusted debt to EBITDA below 2.5x and an CFO/ Debt above 30% on a sustainable basis. Sustained positive free cash flow generation or a stronger demonstration of support by Shell could also translate into considerations for positive rating momentum. An upgrade would also be dependent on an upgrade of Brazil's sovereign rating.

A downgrade could result from a deterioration in the liquidity profile or if leverage remains high without prospects of deleveraging in the near term. In addition, Debt/EBITDA above 3.5x and CFO/Debt below 25% on a sustained basis could trigger a downgrade. Negative actions on Brazil's sovereign ratings could also trigger a downgrade of Raizen's ratings.

The principal methodology used in rating Raizen Energia S.A. was Protein and Agriculture published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113389. The principal methodology used in rating Raizen Combustiveis S.A. was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com.br for a copy of these methodologies.

Headquartered in São Paulo and created in 2011, Raízen represents the 50%-50% joint venture formed by Cosan S.A. (Cosan) and Shell Brazil Holdings BV (a 100% subsidiary of Royal Dutch Shell Plc [Shell]). The joint venture operates under two main legal entities, Raízen Energia S.A. (Raízen Energia) and Raízen Combustíveis S.A. (Raízen Combustíveis), and we analyze the companies as a combined entity, given the existence of cross-guarantees in each other's debt issuances and unison financial strategy.

Moody's National Scale Credit 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 credit 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 ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309.

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.

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

Information types used to prepare the rating are the following: financial data, economic and demographic data, debt documentations, operating data, historical performance data, public information, Moody's information, and regulatory filings.

Sources of Public Information: Moody's considers public information from many third party sources as part of the rating process. These sources may include, but are not limited to, the list available in the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1235261.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Please see the ratings disclosure page on www.moodys.com.br for general disclosure on potential conflicts of interests.

Moody's America Latina Ltda. may have provided Other Permissible Service(s) to the rated entity or its related third parties within the 12 months preceding the credit rating action. Please go to the report "Ancillary or Other Permissible Services Provided to Entities Rated by Moody's America Latina Ltda." in the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1254877 for detailed information.

Entities rated by Moody's America Latina Ltda. and the rated entities' related parties may also receive products/services provided by parties related to Moody's America Latina Ltda. engaging in credit ratings activities within the 12 months preceding the credit rating action. Please go to the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1254878 for a list of entities receiving products/services from these related entities and the products/services received.

The date of the last Credit Rating Action for Raizen Energia S.A. was 10/4/2018.

The date of the last Credit Rating Action for Raizen Combustiveis S.A. was 10/4/2018.

Moody's ratings are constantly monitored, unless designated as point-in-time ratings in the initial press release. All Moody's ratings are reviewed at least once during every 12-month period.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement 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 case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.br.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see ratings tab on the issuer/entity page on www.moodys.com.br for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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.br for further information.

Please see Moody's Rating Symbols and Definitions on the Ratings Definitions page on www.moodys.com.br for further information on the meaning of each rating category and the definition of default and recovery.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com.br for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com.br for additional regulatory disclosures for each credit rating.

Erick Rodrigues
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

No Related Data.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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