-- Brazil-based grain and soybean trading company Ceagro continues to
expand its client base, while maintaining fairly stable margins.
-- We are affirming our ratings on Ceagro, including the 'B' global scale
and 'brBBB-' national scale corporate credit ratings.
-- The stable outlook reflects our expectations that the company will
maintain debt to EBITDA of less than 4x even while expanding its operations.
On Nov. 12, 2012, Standard & Poor's Ratings Services affirmed its ratings on
Ceagro Agricola Ltda., including the 'B' global scale and 'brBBB-' Brazilian
national scale corporate credit ratings. The outlook on both ratings is stable.
The ratings affirmation reflects our belief that Ceagro has adequately funded
its growth through both barter and spot grain origination transactions, while
it enjoys historically low levels of credit risks and fairly stable margins.
As expected, following its 2010 bond issuance, the company increased barter
model transactions, which required additional working-capital requirements
that resulted in higher debt. Total adjusted debt to EBITDA increased to 3.1x
for the 12 months ended June 30, 2012, compared with 1.6x in the same period
in 2011, and funds from operations (FFO) to total debt was 24.6%, compared
with 36.5%. The company's debt has also increased following the depreciation
of the Brazilian Real and higher working capital requirements. Still, Ceagro's
credit metrics are stronger than those in line with a "highly leveraged"
financial risk profile, incorporating the potential volatility of the
company's margins and credit metrics due to volatile grain prices, which can
rapidly weaken liquidity and credit metrics.
We view Ceagro's business risk profile as "weak," reflecting the company's
exposure to soybean and corn producers' performance and credit risks, growers'
exposure to unpredictable weather, and its working-capital intensive barter
business model, which finances part of the farmers' working-capital needs.
Ceagro has gradually increased its funding to its clients to about 25% of the
crop working-capital requirement from about 20% in previous years. We also
view Ceagro's portfolio and geographic diversification as limited, with
exposure to soybean and corn crops only and mainly to the state of Mato
Grosso. Positive factors include Ceagro's strong commercial relationships with
chemical manufacturers and multinational trading companies, its niche position
in soybean origination in Brazil, a conservative hedging policy that minimizes
commodity price risk, and an extensive supplier base for grains. We also
factor in historically very low level of delinquency among its clients and
their good track record, which deliver 100% of the contracted grains volume.
We believe Ceagro will be able to improve its capital structure by the sale of
grains by the end of the crop cycle, lower its working-capital needs, bolster
its growth through its liquidity, and maintain enough cash cushion to face
potential margin calls inherent to the grain trading business. We expect
favorable soybean and corn prices to help maintain the company's expected
total EBITDA generation. The company's adjusted EBITDA margin is likely to be
around 8.5%-9.0% in 2012 and afterwards, while Ceagro maintains an adequate
balance of barter and spot contracts in order to reduce fixed costs and
increases revenues by double digits. Moreover, we expect gradually stronger
cash flows, as Ceagro expands its business by increasing its client base. We
still expect Ceagro to report a negative free cash flow in the next couple of
years due to the need to fund working-capital outflows to expand its grains
origination base mainly under the barter financing model and some capex for
greater storage capacity.
We revised our assessment of Ceagro's liquidity to "less than adequate" from
"adequate." Cash sources include cash and short-term investments of R$40
million as of June 2012 and expected annual FFO generation of about R$50
million, compared with short-term debt of R$60 million, working capital
outflows close to R$90 million, and no dividend payment or significant capital
expenditures in 2012. We assume in our liquidity analysis the company's peak
levels of working-capital needs, given the strong volatility inherent to the
grain trading business. We expect sources of cash to exceed uses in the next
12-18 months by close to 1x.
We believe Ceagro's limited size, narrow product and geographic
diversification, and exposure to volatile commodity markets are significant
risks that could damage its liquidity. In particular, working-capital swings
or worse-than-expected performance could quickly deplete its cash reserves.
Ceagro has limited exposure to commodity price risks, as future prices are
hedged. However, its liquidity weakened due to volatile grain prices in the
second quarter following the drought in the U.S., which resulted in R$40
million of margin calls under its fixed-price contracts. Moreover, we estimate
covenant headroom exceeds 20%; net debt to EBITDA must be below 3.25x under
its bonds to trigger its incurrence covenant.
The stable outlook reflects our opinion that Ceagro will continue expanding
gradually its customer base and credit exposure to it, while capturing higher
economies of scale, leading to higher profitability and cash flows. Its proven
track record in managing growers' performance risks and adequately hedging
future contracts' prices, further minimizing commodity prices volatility
through crop cycles, is a significant rating factor. We expect Ceagro to
maintain debt to EBITDA below 4x through downward cycles and FFO to debt above
15% throughout the harvesting cycles, as ratios tend to be volatile in tandem
with off-season harvesting periods.
We view its business risk profile as a constraining factor on the rating,
given the company's much lower scale compared to peers and potential cash
swings due to volatile commodity prices. However, we could raise the ratings
if Ceagro keeps total debt to EBITDA below 3.0x and an adequate liquidity amid
its expansion. Conversely, we could lower the ratings if the company doesn't
improve its cash generation, either because of adverse markets or more
aggressive financial policies, for example, running commodity prices risks,
which could result in total debt to EBITDA exceeding 5.0x and weaker liquidity.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
Sept. 18, 2012
-- Methodology and Assumptions: Standard and Poor's Liquidity Descriptors
for Global Corporate Issues, Sept. 28, 2011
-- Corporate Criteria: Ratios and Adjustments, April 15, 2008
Corporate Credit Rating B/Stable/--
Brazilian Rating Scale brBBB-/Stable/--
Senior Unsecured B
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
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