September 23, 2016 - 4:43 PM EDT
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Fitch Affirms Cosan Limited at 'BB'; Outlook Stable

Fitch Ratings has affirmed the Long-Term (LT) Foreign and Local Currency Issuer Default Ratings (IDRs) of Cosan Limited at 'BB'. The Rating Outlook is Stable.

KEY RATING DRIVERS

Cosan Limited's ratings reflect the sound business model of its main asset, Cosan S.A Industria e Comercio (Cosan; Fitch foreign and local currency IDRs of 'BB+' and long-term National Scale rating of 'AA+(bra)'), which accounts for around 60% of Cosan Limited's consolidated revenues and EBITDA and 100% of dividends received in the last 12 months (LTM) ended June 30, 2016. Cosan Limited's credit profile benefits from its diversified asset portfolio and predictable cash flow that partly soften the inherent volatilities of its sugar and ethanol business. The one-notch difference compared to Cosan's ratings incorporates the holding company nature and inherent structural subordination of Cosan Limited's debt due to its dependence on dividends received from Cosan.

The ratings incorporate the weaker credit profile of Cosan Limited's current stake in Cosan Logistica S.A (Cosan Logistica), which owns Rumo Logistica Operadora Multimodal S.A. (Rumo), with Foreign and Local Currency Issuer Default Ratings (IDRs) of 'BB-' and Long-Term National Rating of 'A(bra)', both with a Negative Outlook. The still high leverage at Rumo is expected to slow down the potential deleveraging process of the Cosan group. Fitch expects the remaining businesses to provide a growing and robust flow of dividends to Cosan Limited in order to meet its debt service and pay sufficient dividends to its shareholders, while the logistics segment is not expected to pay meaningful dividends over the next four years. The ratings also incorporate Cosan Limited's low leverage and robust liquidity on a standalone basis.

Robust Asset Portfolio

Cosan Limited is a non-operating holding company that carries a robust and diversified asset portfolio that reduces sector concentration risks. The company holds a 62% interest in Cosan, the holding company that is engaged in sugar, ethanol and energy production, and distribution of natural gas, lubricants and fuel. Cosan's three main assets and source of dividends are companies with robust credit quality. Raizen Combustiveis S.A. (Raizen Combustiveis; FC and LC IDRs 'BBB', National Scale rating 'AAA(bra)') is the third largest fuel distributor in Brazil, with predictable operational cash generation. Despite its more volatile results, Raizen Energia S.A. (Raizen Energia; rated the same as Raizen Combustiveis) is the largest sugar and ethanol company in Brazil and as such it benefits from business scale, which somewhat mitigates the frequent challenging scenario for the sector. Companhia de Gas de Sao Paulo (Comgas; FC IDR 'BB+', LC IDR 'BBB-', National Scale rating 'AAA(bra)') is the largest natural gas distributor in Brazil, with high growth potential and predictable operational cash flow. Fitch's Rating Outlook on all of their FC IDRs is Negative to reflect the Negative Outlook on Brazil's sovereign rating.

All of Cosan's businesses reported improved performance in 2015 compared to the previous year. In the last fiscal year, Comgas reported net revenues at BRL6.6 billion and stable EBITDA margin at 23%, while Raizen Combustiveis and Raizen Energia reported on a consolidated basis net revenues of BRL74 million and EBITDA of BRL5.7 billion, 14% and 15% higher than previous year. The other two assets that Cosan invests are Cosan Lubrificantes S.A. and Radar Propriedades Agricolas S.A., which add to business diversification.

Cosan Limited also holds a 72% interest in Cosan Logistica, with the merger of Rumo and ALL enhancing its business model due to the inherent operating cash flow stability and high growth potential of this industry in Brazil. The merger is already contributing to broader business diversification and helping the group to further lessen the cash flow volatility derived from the sugar and ethanol business. Fitch forecasts the logistics business will generate an average EBITDA margin of 44% over the next four years, comparing favourably to Cosan Limited's 30% historical average since March 31, 2013. Fitch does not expect the logistics segment to pay meaningful dividends over the next four years due to the massive capex necessary to improve Rumo's operations.

Low Leverage at Holding Level

Cosan Limited posted low leverage on a standalone basis as of June 30, 2016. At the holding company level, Cosan Limited's leverage measured as net debt-to-EBITDA plus dividends received was 1.4x as per Fitch's calculations, comparing favourably to 2.4x as of Dec. 31, 2015.

The one-notch difference versus the ratings assigned to Cosan is due to the holding company nature and inherent structural subordination of Cosan Limited's debt and the links between the company's operating cash flows to dividends received from Cosan. As Cosan receives dividends from its investments, mainly in Raizen Energia and Raizen Combustiveis, it has to serve or manage its own debt that was amounting BRL760 million at the end of June 2016, before sending resources to its shareholders.

On a consolidated basis, Cosan Limited's leverage was also adequate for the rating category even with the consolidation of Rumo. The net adjusted debt-to-EBITDAR was at 3.8x when dividends received from non-consolidated subsidiaries are factored into EBITDAR figures. Fitch expects the logistics division to slow down the deleveraging process of the group, and for Cosan Limited's consolidated net debt-to-EBITDAR plus dividends received to stay around 3.5x over the next three years.

KEY ASSUMPTIONS

--Increased flow of dividends coming from Comgas, Raizen Combustiveis and Raizen Energia over the next two years to Cosan, reaching around BRL1 billion per year.

--Cosan Logistica not to pay meaningful dividends over the next four years.

--Cosan Limited will not enter into new investments.

--Cosan Limited has the flexibility to reduce the payouts to its shareholders if necessary.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:

--Deterioration of the credit profile of either Cosan or Cosan Logistica;

--Expectation of debt service coverage ratio at Cosan Limited level below 0.5x when the debt matures in 2018, based on reduced dividends to be received; and

--Cosan Limited entrance in new investments financed by debt.

Future developments that may, individually or collectively, lead to a positive rating action include:

--Improvement of the credit profile of either Cosan or Cosan Logistica; and

--Expectation of stronger than anticipated debt service coverage ratio at Cosan Limited based on more robust dividends received.

LIQUIDITY

Cosan Limited posted healthy debt service coverage ratios on a standalone basis as of June 30, 2016. The company's cash plus dividends received covered its short-term debt by 10.0x as of June 30 2016. Cosan Limited posted a cash position of BRL213 million and total debt of BRL760 million, of which short-term debt was BRL67 million. Dividends received amounted to BRL452 million in the LTM ended June 30 2016.

Cosan Limited's total debt consisted of bank debt taken on to finance the acquisition of Cosan shares. The group's strong financial flexibility relative to its access to the debt and capital markets, in combination with dividends received from Comgas, Raizen Energia and Raizen Combustiveis, ensures strong refinancing capacity for Cosan Limited. Fitch believes Cosan Limited has the flexibility to reduce the payouts to its shareholders if necessary.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Cosan Limited

--Long-Term Foreign and Local Currency IDRs at 'BB'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012144

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012144

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Claudio Miori
Associate Director
+55-11-4504-2207
Fitch Ratings Brasil Ltda
Alameda Santos, 700 - 7 andar, Sao Paulo, sp CEP 01418-100
or
Secondary Analyst
Gisele Paolino
Director
+55-21-4503-2624
or
Committee Chairperson
Ricardo Carvalho
Senior Director
+55-21-4503-2627
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
[email protected]


Source: Business Wire (September 23, 2016 - 4:43 PM EDT)

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