TEXT-Fitch affirms Localiza IDRs at 'BBB-', outlook now positive
Dec 5 - Fitch Ratings has affirmed the following ratings of Localiza Rent a Car S.A. (Localiza): --Foreign currency Issuer Default Rating (IDR) at 'BBB-'; --Local currency IDR at 'BBB-'; --Long-term National Scale Rating at 'AA+(bra)'; --Unsecured fifth debenture issuance at 'AA+(bra). Fitch has simultaneously assigned an 'AA+(bra)' rating to Localiza's unsecured sixth debenture issuance due in 2019 in the amount of BRL300 million. The issuances proceeds will be used to refinance indebtedness. The Rating Outlook for Localiza has been revised to Positive from Stable. The Outlook revision reflects Fitch's expectation that Localiza's performance will weather the current scenario of slower economic growth without damaging its consistent performance and credit metrics. Localiza should also benefit from higher GDP growth and economic activity in 2013, and if this occurs the company's ratings could improve. Localiza's investment grade rating reflect its very strong business position within the car and fleet rental industry in Brazil and its track record of a conservative capital structure. Localiza has proven that its business model has consistently allowed the financial flexibility to adjust to changes in the economic cycle while preserving its capital structure and credit metrics. The ratings also incorporate favorable growth prospects for the industry in Brazil. COMPETITIVE ADVANTAGES SUPPORT STRONG BUSINESS PROFILE Localiza has a very strong competitive position within the car and fleet rental industry with a market presence that is nearly four times larger than its closest competitor. The company's position gives it a strong negotiating position with the automobile manufacturers, enabling it to efficiently dilute fixed costs. Localiza's prominent used car sales distribution channel further supports its competitive advantages and enhances financial flexibility. The company has a low cost of financing due to its strong access to the local debt markets, which further improves its competitiveness. WELL-POSITIONED TO FACE INDUSTRY'S RISKS Competition is likely to increase while inflation costs already pressure Localiza`s operating profitability. The company continues to seek scale gains and to reduce its financial costs in order to offset some loss in operating margin as a result of its strategy of maintaining market share. The company also faces changing dynamics in the automotive industry in Brazil. Localiza's solid business expertise and its conservative approach on the pricing strategy will be fundamental to avoiding a deterioration of its profitability. Localiza's performance is partly associated with its pricing strategy for selling used vehicles. An increase in competition among the automobile manufacturers in Brazil, as a result of the increasing participation of the Asian players, may lead to a downward trend for vehicle prices. CASH FLOW EXPANSION AND FINANCIAL FLEXIBILITY PERSIST Localiza continued to improve its operating cash flow generation during 2012, although at lower growth rates. Lower GDP growth and stronger competition has somewhat limited further business expansion. Net revenue grew 10% from 2011 to Sept. 30, 2012 (LTM), reaching BRL3.1 billion, while operating fleet growth was 5%. In the same period, EBITDAR and funds from operations (FFO) increased to BRL967m and BRL658 billion, compared with BRL903mm and BRL821m. During 2010, these figures were BRL720m and BRL649m, respectively. The greater costs with personnel and store rentals have been pressuring Localiza's operating margins over the recent quarters and may pressure overall margins after 2013. Over the last 12 months period ended Sept. 30 2012, EBITDAR margin remained relatively stable at 30.8%, which is still quite consistent with its historical range from about 29% to 31%. The car and fleet rental industry demands significant investments in fleet renewal and for business growth. The company has successfully developed an asset sales strategy that allows it to sell around 70,000 used vehicles per year. This has enabled the company to sell vehicles consistently, including during the difficult first half of 2009. The proceeds of car sales have largely funded fleet renewal, given the significant discounts achievable from auto manufacturers for new vehicles. The potential market value of its relatively modern vehicle fleet is about 1.8x the value of its net debt. Localiza could monetize these assets in the event of a cash flow crisis, since they are not linked to guarantees. During Sept. 30, 2012 (LTM), capex for fleet renewal totaled BRL1.5 billion, and capex for growth reached BRL200 million. To offset these disbursements, inflow of resources from used car sales were BRL1.5 billion. STRONG LIQUIDITY POSITION Localiza has consistently maintained a strong liquidity position. On Sept. 30, 2012, the company had total debt of BRL1.8 billion and had cash and marketable securities of BRL429 million. On a pro forma basis considering a recent debentures issuance (BRL300 million) used to prepay debt, Localiza shows a quite strong debt schedule amortization, with BRL429 million in cash and only BRL302million of debt coming due until 2015. CREDIT METRICS COMPATIBLE WITH THE INVESTMENT GRADE LEVEL The company has a track record of strong credit protection measures for the industry. From 2008 through the LTM ended Sept. 30, 2012, Localiza's FFO Adjusted Leverage averaged2.6x, while the averages for its total adjusted debt/EBITDAR ratio was 2.8x and its net adjusted debt/EBITDAR ratio was 2.3x. The company's debt consists primarily of debenture issuances (56%) in domestic market and local banking credit lines (44%). Fitch expects Localiza to keep a net adjusted debt-to-EBITDAR ratio below 2.5x in the long term. KEY RATING DRIVERS An upgrade of Localiza's ratings should occur if the company continues to sustain its conservative credit metrics, financial flexibility and strong business profile. The ratings could be downgraded due to a combination of higher leverage, lower liquidity, a negative economic outlook for Brazil, or a significant deterioration of the used car market in Brazil. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology
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