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Ratings withdrawn: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
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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"
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national scale credit ratings, please refer to Moody's Credit rating
Methodology published in May 2016 entitled "Mapping National Scale Ratings
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meaning in terms of default risk or expected loss, a historical
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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.
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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.
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