TEXT-S&P affirms MRS Logistica 'BB+' global scale rating
Overview -- We expect Brazil-based railroad company MRS to keep reporting strong and stable cash flows, reflecting its efficient operations and favorable contract terms with its main clients. -- We are affirming our 'BB+' global scale and 'brAA+' Brazilian national scale corporate credit ratings on MRS. -- The stable outlook reflects our expectations that credit metrics will remain at current levels despite sizable capital expenditures. Rating Action On Dec. 6, 2012, Standard & Poor's Ratings Services affirmed its 'BB+' global scale and 'brAA+' national scale corporate credit ratings on MRS Logistica S.A.. We are also assigning a 'brAA+' rating on the company's fourth debentures issuance, and affirming the 'brAA+' issue rating on its fifth debentures issuance. The outlook is stable. Rationale We expect MRS's performance to be stable in 2013 despite lower iron ore prices for iron ore producers-the company's main clients--since mid-2012. We expect that transported volumes will continue to grow, both additional iron ore cargo from existing and new clients and expansion in general cargo. MRS has also managed cost pressures well, and we expect continuing operating efficiency gains to support margins. The company's "satisfactory" business risk profile reflects a favorable tariff model and contract terms with its captive clients, take-or-pay clauses even under an adverse market conditions for its clients, and MRS's strategic importance to its shareholders, which are also the company's main clients. These factors result in a resilient cash flow and strong profitability. MRS's financial risk profile is "significant." Despite its strong cash generation, the company has to spend heavily to continue expanding its capacity and efficiency, which it should partly fund through new debt issuances. However, since the decision to expand translates into additional contracts with existing or new clients, we expect debt to remain fairly stable in the next few years, as cash flows expand in tandem with incremental debt. Furthermore, following the recent regulatory changes in tariff ceiling, we don't expect a significant impact on the company's operations, because MRS has operated at tariff levels below the existing caps. MRS's business risk profile is "satisfactory." Even though we expect market conditions for iron ore exports to remain challenging during 2013, we project volumes for MRS to increase slightly, mainly due to higher demand for iron ore transportation from MMX Mineracao e Metalicos S.A. In the 12 months ended Sept. 30, 2012, EBITDA margins, according to our criteria, reached 46.8%, up from 45% in the same period of 2011. The company is constantly striving to improve its operating efficiency through adequate maintenance of its assets and renewal of inefficient equipment. This is reflected in the company's operating ratio (costs and expenses, including depreciation and amortization, as a percentage of revenues) of 66.4% in the first nine months of 2012, up from 61.4% in the same period of 2011. The higher ratio mainly reflects nonrecurrent expenses during 2012, and is still stronger than those of its rated peers. The company's financial risk profile is "significant." Although we expect only slight volumes increase for 2013, we expect MRS's metrics to remain strong, such as EBITDA margins above 45%. However, we expect MRS to continue to invest heavily in its operations, partly through new debt issuances, leading to fairly stable leverage metrics for the next few years. We expect MRS to maintain the total debt to EBITDA of 3.0x by the end of 2012 and below 2.8x in 2013, and funds from operations (FFO) to total debt at 25%. As of Sept. 30, 2012, MRS's financial metrics were fairly stable, although debt increased, leading to a total debt to EBITDA of 3.0x in the 12 months ended September 2012, up from 2.8x in the same period of 2011. Higher debt was mainly due to capital expenditures, as the company purchased more efficient locomotives and control systems to haul more cargo on tighter schedules but with high safety margins. Despite the increase in debt, the more efficient operations have led to stronger cash generation, as seen in FFO to total debt of 22.1% in 12 months ended September 2012, up from 19.2% in the same period of 2011. Liquidity We assess MRS's liquidity as "adequate." Although the company's capital expenditures are expected to be large in the next few years, it has flexibility to reduce them in case of adverse market conditions, as most of them are for equipment purchase to comply with higher demand. The company's cash position of R$623 million as of September 2012, and cash generation are sufficient to cover working capital needs. The company has a fairly smooth amortization profile, as it has R$371.7 million in short-term debt maturing, as of September 2012. We included several factors and assumptions in our liquidity assessment: -- We expect MRS's liquidity sources (cash position, cash generation, and contracted financing lines available) to exceed uses by 1.2x over the next 12 months; -- Annual debt maturities for the next few years are fairly smooth: about R$450 million of debt maturing by the end of 2013 and R$290 million due 2014; -- Even under a 20% EBITDA decrease, we expect liquidity sources to remain greater than uses; -- MRS has restrictive clauses (covenants) in some of its debt contracts, with fairly comfortable headroom, and could comply with them if EBITDA drops by 20%; -- MRS is expected to spend about R$1 billion in annual capital expenditures for the next few years, but it can reduce them, if needed; and -- MRS distributes dividends at a minimum of a 50% payout level, and we expect the company to continue to do so, but it has some flexibility to reduce the payout ratio if its cash flows are stressed. Outlook The stable outlook reflects our expectation that strong iron ore exports will maintain MRS's cash flows and fund capital expenditures, while the company maintains "adequate" liquidity. The significant investments projected for the next few years will result in negative free operating cash flows; however, we expect the company's adjusted debt to EBITDA to be 3.0x and FFO to total debt at 20%. An upgrade of MRS would depend on stronger-than-expected financial metrics amid projected investments and debt profile improvement. We could lower the ratings if financial metrics significantly weaken due to investments, or a more aggressive dividend distribution policy that may hurt MRS's cash flows, or adverse market conditions that weaken the company's business risk profile. 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 New Rating MRS Logistica S.A. Senior Unsecured brAA+ Ratings Affirmed MRS Logistica S.A. Corporate Credit Rating Global scale BB+/Stable/-- National scale brAA+/Stable/-- Senior Unsecured brAA+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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