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TEXT - Fitch affirms Virgolino de Oliveira S/A Acucar e Alcool
December 21, 2012 / 8:46 PM / 5 years ago

TEXT - Fitch affirms Virgolino de Oliveira S/A Acucar e Alcool

(The following statement was released by the rating agency)
    Dec 21 - Fitch Ratings has affirmed at 'B' the foreign and local currency
Issuer Default Ratings (IDRs) of Virgolino de Oliveira S/A Acucar e Alcool (GVO)
and Virgolino de Oliveira Finance S/A (Virgolino Finance). The Rating Outlook is
Stable. A full list of GVO's ratings follows at the end of this press release.

GVO and Virgolino Finance's ratings reflect the group's leveraged capital 
structure and tight liquidity position. The ratings further incorporate the 
group's exposure to the cyclicality of the sugar and ethanol commodities' price 
cycle, as well as the volatility of cash flow generation, exposing the group to 
refinancing risk. They also reflect the exposure of GVO's sugarcane production 
business to volatile weather conditions, foreign currency risk relative to a 
portion of its debt; and the ethanol industry dynamics, which are strongly 
linked to Brazil's regulated gasoline prices and related government energy 
policies. The ratings benefit from GVO's adequate business model and the 
geographical location of its production units. The ratings also reflect 
positively GVO's strategic shareholding position in Copersucar and the long term
business partnership between the two companies.

GVO's main challenge is to reduce leverage through improved operational cash 
flow in the next two to three years. The ratings could be under pressure in case
the expected deleveraging does not materialize.

Adequate Business Profile Enhanced by Co-operation with 


GVO has an adequate business profile, based on its favorable location, 
diversified production base and operational flexibility. The company also 
benefits from the favorable prospects related to ethanol consumption in the 
country and Brazil's significant presence in the global sugar trade.

GVO enjoys competitive advantages linked to its participation in Copersucar 
which allows it to maintain EBITDA margin above the industry average. The group 
benefits from Copersucar's robust scale, which results in mitigated demand 
risks, lower logistics costs and better stability in the company's collection 
flow. GVO also benefits from less restrictive access to liquidity during 
challenging operating scenarios when compared to other peers in the 
agribusiness, due to the credit lines provided by Copersucar. Copersucar's large
scale business accounts for approximately 18% of sugar and ethanol sales in the 
Central South region of Brazil and 10% of the sugar international market, making
it an important price making agent. Copersucar has 48 partner mills with a 
combined sugar cane crushing capacity of around 115 million tons per year and 
also counts on sales contracts with non-partner mills, in a lesser extent. 

High Leverage, Expected to Decline

In the LTM ended Oct. 31, 2012, GVO's consolidated net adjusted debt/EBITDAR 
ratio, considering Copersucar dividends, was 6.2x, above Fitch's expectations of
around 4.5x for this period. This higher leverage resulted from the combination 
of pressured FCF ? the consequence of higher capital expenditures during the 
last harvest, which included crop expansion to increase the contribution of 
owned sugar cane supply ? and the negative impact of the FX variation on GVO's 
debt. Additionally, the October 2012 figures reflect the middle of the crop 
period, when working capital needs were higher compared to the end of the 
harvest. Excluding advances from Copersucar backed by sugar and ethanol 
inventories (BRL257.8 million), GVO?s net adjusted debt/EBITDAR would be 5.3x 
for the same period.

Fitch expects GVO's CFFO to increase in the coming years, supported by a higher 
utilization of its industrial capacity, which should allow it to reduce leverage
within the next couple of years to  between 4.3x and 4.6x, including the 
advances from Copersucar, levels more appropriate for the rating category. These
estimates assume average sugar international prices of USD20 cents/ pound for 
the next years and stable ethanol prices compared to current levels.

Cost Savings, Scale Benefits and Risk Management Support Related to Copersucar 

GVO transfers 100% of its production to Copersucar, through a long term 
exclusivity contract, mitigating demand risk. Prices for its products are linked
to the average sugar and ethanol market prices plus a premium (Esalq+2%). The 
premium is possible due to logistics savings and scale gains obtained through 
the partnership with Copersucar. GVO is responsible for the agricultural 
activities and for the sugar and ethanol production, while Copersucar is 
responsible for all commercial activities and associated logistics, as well as 
for the implementation of hedging policies. 

Copersucar remunerates GVO based on the realized production on a monthly basis 
during the year, independently of the moment the sale to the final customer 
occurs. This translates to a higher flexibility in GVO's working capital 
management compared to other companies that face seasonality in their 
activities. GVO's businesses are exposed to the volatility of the sugar and 
ethanol prices. However, the risks of future sales operations through 
derivatives transactions and eventual margin calls remain under Copersucar's 

Tight Liquidity Supported By Credit Line from Copersucar: 

As of Oct. 31, 2012, GVO reported a cash position of BRL150 million, which 
covered only 24% of its short-term adjusted debt. However, Copersucar provides 
to GVO a significant working capital financing line, in the amount of up to 40% 
of its annual revenues, equivalent to approximately BRL400 million, which 
enhances financial flexibility. This credit line is subject to certain limits in
terms of revenues and it is linked to guarantees on inventories and/or bank 
guarantees. This facility is an important liquidity source for GVO, especially 
in periods of more restrictive access to credit. 

Moderate Exposure to FX Fluctuations: 

GVO's debt profile is moderately exposed to foreign exchange movements with 45% 
of debt denominated in USD. Although the company does not maintain protection 
through derivatives, the currency exposure is partially mitigated by the fact 
that the price for GVO's products is linked to the dollar. 

As of Oct. 31, 2012, consolidated adjusted debt including obligations related to
leased land was BRL2.2 billion. The debt comprised of two international notes 
issuances (45%); loans granted by Copersucar (17%); financings from the 
Brazilian Economic Social and Development Bank (BNDES, 10%); export prepayment 
transactions (7%) and others (21%). 

Key Rating Drivers: 

Negative rating actions could be driven by GVO?s failure to deleverage and/or 
lower than expected operational cash flow generation and deterioration of its 
operating margins. Improvement in the group's liquidity position coupled with a 
longer and more manageable debt maturity profile with lower leverage levels, 
could lead to a positive rating action. 

Fitch affirms GVO and Virgolino Finance's ratings as follows. 

--Long-term national scale corporate rating at 'BBB(bra)';
--1st debenture issuance due 2014 at 'BBB(bra);
--Foreign and local currency IDR at 'B'. 

Virgolino Finance:
--Foreign and local currency IDR at 'B';
--Senior unsecured notes at 'B/RR4'. 
The Rating Outlook is Stable. 

 (Caryn Trokie, New York Ratings Unit)

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