SAO PAULO (S&P Global Ratings) June 8, 2021--Brazil-based sugarcane processor and fuel distributor, Raízen, has been consistently in the spotlight in the past several months: from yesterday's announcement of the acquisition of Shell's Brazilian lubricant business to the recent corporate reorganization, the filing for an IPO, to the large acquisition of Biosev. However, S&P Global Ratings believes that none of these events should impact the ratings on Raizen S.A (BBB-/Stable/-- on global scale and brAAA/Stable/--). On the one hand, the company's stand-alone credit profile (SACP; currently at 'bbb', one notch above the final rating) provides liquidity and balance sheet cushion to absorb the acquisition-related debt. On the other hand, the rating upside is limited to one notch above our 'BB+' transfer and convertibility (T&C) assessment of Brazil (BB-/Stable/B). Below, we provide details on the most significant events that occurred recently, expected timeframes, and our credit view.
The lubricant business acquisition widens product diversification. Raízen announced yesterday the acquisition of Shell's lubricant business in Brazil, which includes one lubricant blending plant and one terminal, both of which are located in the state of Rio de Janeiro, as well as the distribution chain and its related agreements. Upon the conclusion of the deal, the acquired entity will operate separately from Cosan Lubrificantes e Especialidades S.A. (Moove), Cosan S.A. 's lubricant business. (Cosan is the parent company of Raizen). The acquisition will provide synergies to Raizen's fuel distribution business, and although the purchase amount hasn't been disclosed, we don't expect the transaction, once it's completed, to materially affect Raízen's leverage.
Biosev's acquisition further increases Raizen's scale, raising its leverage by 0.3x-0.5x. The deal is in its final stages, having already the approval from Brazilian anti-trust regulator CADE. It's pending the precedent conditions and, most importantly, the approval of Biosev's creditors regarding the company's corporate restructuring (which will allow Biosev to be integrated into Raízen free of net debt), and which we believe could be completed in the next few months. The acquisition amount consists of equity and a cash payment of R$3.6 billion, and the deal includes an earn-out structure through which Raízen could disburse up to R$350 million to Biosev's shareholders in 2026. However, such an earn-out structure won't materialize amid a liquidity event, such as Raízen's IPO.
We believe Raízen should have enough leeway to absorb Biosev, because its purchase would increase Raízen's annual EBITDA by about R$1.8 billion (not including the IFRS16 impact), and its total crushing capacity to 105 million tons from about 73 million. According to the disclosed terms, and adjusting for Biosev's EBITDA and debt by leasing agreements, we estimate Raízen's consolidated pro forma adjusted leverage in the 2.0x-2.5x range by March 2022.
A simplified corporate structure facilitates IPO. The company has recently announced a corporate reorganization in order to prepare for an IPO. Raízen Combustíveis S.A. has changed its name to Raízen S.A., and is now the controlling entity of Raízen Energia S.A. (the sugarcane processor), consolidating the group's figures and becoming the driver of the group's credit profile, while remaining as an operating entity in the fuel distribution business. Raízen S.A. will remain a joint venture between Royal Dutch Shell PLC (A+/Stable/A-1) and Cosan S.A. (BB-/Stable/--). We already analyzed the two sister companies (Raizen Energia and Raizen Combustiveis) on a consolidated basis as a single economic entity, given that they're managed as a single unit and because of the existence of cross-guarantee and cross-default clauses within their debts. We expect Raízen Energia to continue to guarantee the new parent's debts, and vice-versa.
Therefore, the debts at the parent level won't rank disproportionally weaker in priority of payment, while the issuer credit ratings on both entities will continue to reflect the group's credit quality.
IPO will enhance financial flexibility to pursue growth. Raízen recently filed for an IPO on the Brazilian stock exchange. Although timing and amounts are uncertain, the proceeds would strengthen the company's metrics and liquidity, after the potential acquisitions of Biosev and Shell's lubricant business, which regardless of the IPO, the current rating on Raizen would have enough cushion to absorb. If the IPO is successfully completed, we expect the company to remain jointly controlled by Cosan and Shell due to a shareholders' agreement.
Shareholders are committed to low leverage. Cosan and Shell are committed to maintain Raízen's metrics in line with the investment-grade rating threshold, with debt to EBITDA below 2.5x. As a result, the owners agreed to suspend dividends since the pandemic's outbreak and reached an equity support agreement at the end of 2020, according to which both companies would inject up to $700 million in cash into Raízen to contain its leverage, in addition to the $700 million committed credit facility as a liquidity buffer.
Willingness to expand and diversify business. There's has been a lot of speculation regarding Raízen's potential acquisition of one of the oil refineries from Petrobras. Such a purchase would increase the company's fuel business integration, and further diversify revenue beyond ethanol and gasoline sales, energy cogeneration, and sugar and ethanol production. However, we believe the bidding process for these refineries has been delayed, and if it happens, might be completed only in 2022. It also might have limited impact on leverage.
Despite acquisitions and business volatility, Raizen's adjusted leverage edged up to 2.3x in fiscal 2021 from 2.1x in fiscal 2020. Raízen's operating performance in fiscal 2021 (ended March 31, 2021) was slightly worse than in the previous year mostly due to difficulties in the fuel distribution business. This segment took a hit from the COVID-19 outbreak in terms of lower fuel sales due to the mobility restrictions in Brazil, especially during the first quarter of fiscal 2021. The volume recovery in the next few quarters wasn't enough to offset the impact, except for diesel sales, which increased about 4% compared with fiscal 2020. Otto cycle volumes decreased 12% and aviation fuel volumes plummeted 73%, with overall gasoline equivalent volumes falling 11%. The impact was even deeper in the company's Argentine operations, due to stricter mobility restrictions, with volumes down more than 20%. This resulted in the segment's lower EBITDA, which was offset by the performance of the sugar and ethanol business. The adequate climate conditions resulted in crushing levels of 61.5 million tons of sugarcane, compared with 59.6 million in fiscal 2020. This, combined with better sugar yields (total recoverable sugar [TRS]) and the shift of the mix towards sugar (52% versus 49% in the previous harvest) boosted sugar output by 16%, which was sold at much higher average prices (more than R$1,500 per ton, versus about R$1,200 in fiscal 2020) due to the weaker Brazilian real and the increase in the NY#11 prices. The slightly higher ethanol output, despite the lower mix, as well as prices, also benefited the results.
No ratings change, and considerable rating cushion. All of these factors haven't affected the ratings on Raízen. We limit our ratings on Raizen at one notch above the 'BB+' T&C assessment of Brazil, because about 95% of the company's assets are in Brazil (and around 5% are in Argentina). The company's SACP is already one notch higher than the final rating of 'BBB-' because of this limitation, so any upside movement in the sovereign rating and T&C assessment could prompt an upgrade of Raízen. On the other hand, we believe the business diversification brings EBITDA and cash flow stability despite volatilities the company currently faces. Also, the shareholders' historical commitment to contain Raizen's leverage prompts us to expect this metric to reach a maximum of 2.5x-3.0x. Even with some business deterioration and somewhat higher leverage, the rating has a cushion because of the higher SACP.
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
| Primary Credit Analyst: | Bruno Matelli, Sao Paulo + 55 11 3039 9762; bruno.matelli@spglobal.com |
| Secondary Contacts: | Flavia M Bedran, Sao Paulo + 55 11 3039 9758; flavia.bedran@spglobal.com |
| Victor H Nomiyama, CFA, Sao Paulo + 55 11 3039 9764; victor.nomiyama@spglobal.com |
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