TEXT-S&P affirms Sao Martinho S.A. ratings
(The following statement was released by the rating agency) Overview -- Brazil-based sugar and ethanol producer Sao Martinho continues to show better agricultural and industrial yields than industry average. -- The leverage metrics increased somewhat due to the acquisition of 32% of Santa Cruz's assets and weaker cash flows. -- We are affirming our 'BB+' global scale and 'brAA+' Brazil national scale corporate credit ratings on Sao Martinho. -- The stable outlook reflects our view that the company will be able to reduce the leverage metrics quickly through improved efficiency and the consolidation of its recent acquisition. Rating Action On Oct. 4, 2012, Standard & Poor's Ratings Services affirmed its 'BB+' global scale rating and 'brAA+' corporate credit ratings on Sao Martinho S.A. The outlook is stable. Rationale The ratings affirmation reflects our view that the company's solid assets will allow it to continue generating free operating cash flows and quickly reduce the leverage metrics. Credit metrics have weakened in the past few quarters given poor weather and weak ethanol prices. However, we expect stronger operating performance in the 2012-2013 harvest, stemming from higher availability of cane following greater maintenance and expansion investments in its plantation fields during the past few harvests. Better agricultural yields and higher capacity use should translate into stronger cash flow generation. We assess Sao Martinho's financial profile as "significant." Higher leverage is due to weaker cash flows, the acquisition of 32.18% of Usina Santa Cruz sugarcane mill (and proportional debt consolidation), and management's decision to keep higher cash to cushion against the industry and external markets volatility. This strategy is aligned with our assessment of Sao Martinho's moderate financial policies, including a more conservative approach to acquisitions than its peers', the historical maintenance of long-term debt, and adequate cash. We estimate fairly stable sugar prices at about 21 cents per pound for the next few harvests. In addition, the bulk of the 2012-2013 agreements have already been contracted. We also estimate productivity, measured by tons of cane per hectare, to increase to about 81 this harvest due to the investments in the plantations and more favorable weather conditions. We expect the productivity to rise to 85 tons of cane per hectare afterwards, which is in line with the company's historical figures. Under this scenario and incorporating the higher crushing volumes, we expect adjusted EBITDA margins of more than 40% in fiscal 2012, compared with 33.8% in fiscal 2011. It is important to highlight that we adjust debt by operating leases and renegotiated taxes, and adjust EBITDA by subtracting crop treatment and biological assets, which result in considerably different ratios from those the company reports. We estimate total adjusted debt to EBITDA to be about 4.5x by the end of 2012-2013 harvest, and close to 3.6x and adjusted funds from operations (FFO) to debt of about 30% in the 2013-2014 harvest. The last metric was 19.6% for the 12 months ended June 30, 2012. Liquidity We view Sao Martinho's liquidity as "adequate." Management decided to strengthen its cash position to cushion against potentially higher market volatility. Cash at hand was R$793 million as of June 30, 2012, up from R$410 million as of March 31, 2012. This, coupled with our estimated annual FFO generation of more than R$400 million, compares favorably with the company's short-term debt maturities of R$358 million (including obligations with Copersucar), capital expenditures of R$323 million, and dividend distribution of about 30% of net income (close to R$40 million). We expect sources of cash to exceed uses by more than 1.5x in the next 12-18 months. We also expect sources to continue exceeding uses even if EBITDA declines by 20%. The company has very comfortable headroom it its covenant triggers and will remain compliant even if EBITDA declines by more than 50%. The Santa Cruz mill, in which Sao Martinho has a 32.18% stake, has breached some of its debt covenants, but it has obtained waiver from the banks. Even if the company were to be responsible for 100% of the subsidiary's debt, Sao Martinho would still have comfortable headroom in its covenant triggers. Outlook The stable outlook reflects our view that Sao Martinho will maintain moderate financial policies, with credit metrics in line with a "significant" financial risk profile in the near future. We also expect it to maintain "adequate" liquidity even amid weaker leverage metrics due to acquisitions. The cogeneration energy production and expected higher crushing for this harvest will result in higher revenues and cash flows. We expect the company's adjusted debt to EBITDA to improve to less than 4x by the end of the 2013-2014 harvest and to maintain it at that level afterwards. We could downgrade the company if it won't improve profitability as expected, resulting in a leverage metric of more than 5x. Additionally, if liquidity depletes due to a more aggressive acquisitive strategy, we could lower the ratings. Although unlikely in the short term, we could upgrade Sao Martinho if its initiatives to expand its crushing and capacity use and the investments to increase energy cogeneration result in lower fixed costs, greater economies of scale, and more stable cash flow generation, leading to total debt to EBITDA of less than 2.5x and FFO to debt of more than 40%. Related Criteria And Research -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed Sao Martinho S.A. Corporate Credit Rating BB+/Stable/-- Brazilian Rating Scale brAA+/Stable/-- (Caryn Trokie, New York Ratings Unit)
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