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TEXT-S&P affirms MRS Logistica 'BB+' global scale rating
December 6, 2012 / 8:25 PM / in 5 years

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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