(The following statement was released by the rating agency)
-- 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.
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.
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
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.
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.
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
Sao Martinho S.A.
Corporate Credit Rating BB+/Stable/--
Brazilian Rating Scale brAA+/Stable/--
(Caryn Trokie, New York Ratings Unit)