November 12, 2012 / 10:05 PM / 5 years ago

TEXT-S&P affirms Ceagro Agricola 'B' rating

     -- 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.

Rating Action
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

Ratings List
Ratings Affirmed

Ceagro Agricola
 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 All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 
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