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TEXT-S&P affirms Sao Martinho S.A. ratings
October 4, 2012 / 5:31 PM / in 5 years

TEXT-S&P affirms Sao Martinho S.A. ratings

(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.

Rating Action
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

Ratings List
Ratings Affirmed

Sao Martinho S.A.
 Corporate Credit Rating                BB+/Stable/--      
 Brazilian Rating Scale                 brAA+/Stable/--    

 (Caryn Trokie, New York Ratings Unit)

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