Overview -- 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. Rationale 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. Liquidity 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. Outlook 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 www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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