Moody’s Takes Action on Cosan’s Ratings

Instant Max AI

(Moody’s Investors Service, 17.Mar.2017) – Moody’s Investors Service affirmed the ratings of the notes issued by Cosan Overseas Limited and Cosan Luxembourg S.A. and guaranteed by Cosan at Ba3.

At the same time, Moody’s América Latina affirmed Cosan S.A. Indústria e Comércio’s corporate family ratings at Ba2 (global scale) and upgraded the national scale (NSR) rating to Aa1.br from Aa2.br. The outlook was revised to stable from negative.

The action mirrors the change in outlook to stable from negative, on March 17, of the ratings of its subsidiaries Raizen (Ba1 stable) and Comgás (Ba2 stable), both of which are constrained by Brazil’s sovereign bond ratings. On March 15, Moody’s changed Brazil’s outlook to stable from negative and affirmed its issuer rating, senior unsecured at Ba2 and shelf ratings at (P)Ba2.

Ratings affirmed:

Issuer: Cosan Luxembourg SA – $51 million equivalent senior unsecured notes due 2018: Ba3 – $121 million senior unsecured notes due 2023: Ba3 – $650 million senior unsecured notes due 2027: Ba3 Issuer: Cosan Overseas Limited – $500 million perpetual bonds: Ba3 Outlook actions: Revised to stable from negative

RATING RATIONALE

Cosan’s Ba2 corporate family rating reflects the group’s aggregate credit risk, and is supported by the company’s diversified portfolio of businesses, including the entire sugar-ethanol chain, fuel and gas distribution, and lubes in Brazil, and its adequate liquidity profile. The company’s diversification, especially towards resilient businesses such as the fuel and gas distribution, translates into a stable cash source over the long-term. We expect Raízen and Comgás to distribute a significant amount of dividends over the next several years, which will be the primarily liquidity source to service Cosan’s obligations.

Constraining the ratings is Cosan’s ongoing corporate restructure, likely high dividend upstream to Cosan Limited — although the company is expected to generate enough cash to fund those dividends and reduce leverage — and an acquisitive growth history. Still, the company has not made any significant acquisitions over the past few years and entered a deleveraging path with strong dividends from Comgás and Raizen. Cosan no longer proportionally consolidates its stake in Raízen, but we continue to incorporate Raízen’s strengths, including its strong cash generation, and risks, such as the exposure to the underlying volatility of the sugar-ethanol business, in Cosan’s ratings.

The bulk of Cosan’s cash generation comes from dividends from Raízen and Comgás and, consequently, we see the debt at Cosan S.A.’s level as structured subordinated to the debt at the operating companies. The recent rating action affirming Raízen and Comgás ratings and outlook change to stable from negative followed the action that affirmed Brazil’s government bond rating to Ba2 and changed the outlook to stable from negative. Although we believe a significant portion of Cosan’s cash flows, represented by Raízen Combustíveis and Comgás, is more resilient than the overall economy in Brazil, these entities are not fully insulated from the deterioration in the domestic environment.

The stable outlook on Cosan’s ratings mirrors the stable outlook on its two main subsidiaries, Raízen and Comgás.

A downgrade of Cosan’s ratings could result from further negative rating actions on Comgás or Raízen or if liquidity deteriorates. In addition, the ratings could be downgraded if total adjusted debt to EBITDA is sustained above 4.0x.

An upgrade of Cosan’s ratings could result from positive rating actions on Comgás or Raízen. In addition, the company would have to maintain an adequate liquidity and gross leverage below 3.2x (All pro-forma ratios including Raizen figures)

Headquartered in São Paulo, Cosan S.A. Indústria e Comércio has a 50% stake in Raízen (Ba1/Aaa.br stable) and a 62.6% stake in Comgás (Ba2/Aa1.br stable). With annual revenue of BRL 81.2 billion (approximately $24.9 billion) as of December 2016, Raízen is one of the global leading players in the sugar-ethanol segment with an installed crushing capacity of 68 million tons and also the third largest Brazilian fuel distributor, operating 6,027 gas stations, mainly under the Shell brand name. Comgás, with annual net revenues of approximately BRL 7.0 billion (approximately $2.1 billion) in the same period, is Brazil’s largest gas distributor, providing natural gas to industrial, residential, commercial, automotive, thermal-power generation and co-generation consumers. The company benefits from an attractive concession area strategically located in one of the most densely populated and economically robust regions in the country. Additionally, Cosan produces and distributes automotive lubricants and base oil under the Mobil brand name with net revenues of BRL 1.9 billion ($0.5 billion) as of December 2016. In the fiscal year 2016 Cosan’s net sales reached BRL 7.5 billion (approximately $2.3 billion).

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