Fitch Ratings has assigned Ambipar ParticipacOes e Empreendimentos S.A. (Ambipar) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'BB-' with a Stable Rating Outlook.

Fitch currently rates Ambipar and its subsidiaries', Emergencia ParticipacOes S.A. (Emergencia) and Environmental ESG ParticipacOes S.A. (Environmental), Long-Term National Scale Ratings 'AA-(bra)' with a Stable Outlook.

Ambipar's credit profile reflects its outstanding position in the environmental services industry, with strong growth potential, and the diversification of its revenues in countries that are more economically stable than Brazil. The company also benefits from its favorable track record of contract renewal and the reasonable protection of its adequate margins, due to contractual pass-through mechanisms of costs, which are mostly variable. Ambipar and its subsidiaries' ratings are limited by its consolidated high gross leverage, with important cash flow consumption by interests, as well as the lack of a longer performance track record of the company.

The Stable Outlook reflects Ambipar's ability to sustain robust liquidity and gradual indebtedness reduction in the medium term, under lower investments and absence of significant acquisitions, which should bring gross and net leverage to more moderate levels.

Key Rating Drivers

Favorable Business Model: Ambipar's business model includes a set of service provisions in its two main operating segments: environment (mainly waste management and recovery) and response (mitigation of environmental damage from accidents). The environment segment (where the subsidiary Environmental operates) represents around 50% of the revenue and benefits from agreements with an average duration of five years and low contractual exposure to volume risk. The response segment (where the subsidiary Emergencia operates) corresponds to around 50% of the revenue and is supported by contracts lasting around three years, which are renewable.

Approximately 25% of this revenue is recurrent, and the remainder is related to the number of occurrences. The company's current strategy, focused on organic growth, reduces its exposure to acquisition execution risks.

Geographic Diversification: Ambipar's international activities are mainly concentrated in low-risk countries in Latin America, in addition to North America and Europe, which represent, respectively, around 15%, 25% and 5% of its revenues. The record of contract renewals, above 95%, reflects the absence of competition with similar geographic coverage and service provision, which gives the company a competitive advantage. The strategy is to work mainly with private clients and expand its operations based on complementary services, operating in an evolving industry, with low penetration and high competitiveness.

Moderate Profitability: The services provided by Ambipar have an EBITDA margin of 25% to 30% in Brazil and abroad. Approximately 70% of the cost and expense structure is variable and mostly accounts for personnel, which allows greater flexibility to adjust and protect margins in scenarios of weak business demand. Service provision contracts incorporate the pass through of payroll and other non-manageable costs variations.

High Interest Payments: Debt interests should continue to represent high cash commitments in the coming years. The base scenario considers increase in EBITDA to BRL1.4 billion in 2023 and BRL1.5 billion in 2024, supported by business expansion, with cash flow from operations (CFFO) reaching around BRL115 million and BRL415 million in the respective years, after interest payments. Estimated investments range from BRL450 million to BRL500 million in the two-year period, resulting in negative FCFs close to BRL376 million in 2023 and BRL51 million in the following year.

High Gross Leverage: Fitch expects Ambipar to move its gross debt/EBITDA ratio to more conservative levels. The expectation is that gross leverage will be 5.7x at the end of 2023, with a reduction to less than 4.5x in 2025, as the company expands its EBITDA generation and uses part of its cash to repay debt. Net financial leverage has been moderate, with Fitch's base case scenario considering a reduction to less than 3.0x in 2025.

It also accounted for the equity injection of BRL717 million concluded by the end of 2023 to strengthen its capital structure. Fitch does not anticipate any material gross debt reduction and also expects low to moderate reduction of around 0.5x on net leverage ratio due to the capitalization. The high volume of debt should result on interest coverage by EBITDA to remain low, at 1.2-1.5x, in 2023-2024, and above 2.0x from 2025 onwards.

Consolidated Approach: The assessment of Ambipar and its two subsidiaries are on consolidated basis due to the high legal ties between them, such as relevant guarantees and cross-default clauses in the group's financial obligations, in accordance with Fitch's 'Parent and Subsidiary Linkage Rating Criteria'. Fitch also considers the strategic and operational incentives to be high for the holding company to support the two subsidiaries, if necessary. Both are relevant for the group's revenue and EBITDA, with broad growth potential and capturing synergies. Emergencia and Environmental are managed in an integrated manner.

Derivation Summary

Ambipar's credit profile is weaker than that of Aegea Saneamento e ParticipacOes S.A. (Aegea; BB/Stable). Both operate under long-term contracts, with relatively stable demand, although Aegea's business is more resilient. Aegea's EBITDA margins in the range of 50%-60% are higher than those of Ambipar (around 25%), although the geographic diversification of Ambipar's operations is superior and strengthens its business model.

Ambipar's rating incorporates the expectation of a gradual increase in its operating cash generation, while Aegea's considers the important challenge of relevant investments and efficiency improvements in important recently incorporated assets. Aegea's financial profile presents high leverage due to the expectation of the company's strong investment cycle and should remain close to Ambipar throughout the rating horizon. Aegea's demonstrated access to the debt market favors its financial flexibility.

Ambipar's credit profile evenly compares to FS Industria de Biocombustiveis Ltda's (FS; BB-/Stable), which operates in the volatile Brazilian ethanol industry. FS and Ambipar's leverage profiles are similar and Fitch incorporates both companies to deleverage in the medium term. FS EBITDA margins at around 30% is above Ambipar's and its low cash cost business model partially mitigates its operations within riskier industry as compared to environmental services.

Key Assumptions

Average EBITDA margins of 27% from 2023 to 2025;

Average annual capex of around BRL480 million from 2023 to 2025;

Dividends of 25% of net income.

Absent of acquisitions.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Longer track record of Ambipar's growth of operations;

Net Debt/EBITDA below 3.0x and Gross Debt/EBITDA below 4.0x, sustainably.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Net Debt/EBITDA above 4.0x and Gross Debt/EBITDA above 5.0x, sustainably;

EBITDA interest coverage ratio below 1.5x, sustainably;

Weakening of liquidity profile with refinancing risks increase;

Deterioration of profitability with EBITDA margins below 22%.

Liquidity and Debt Structure

Strong Liquidity: Fitch expects Ambipar to maintain robust liquidity in the coming years also supported by the recently concluded equity injection. By the end of June 2023, the group registered strong balance of cash and equivalents, of BRL3.2 billion, as compared to short-term debt of BRL1.0 billion, a coverage of 3.2x, and the expectation of negative FCF. The group presents extended debt repayment schedule and has demonstrated access to financing sources.

Ambipar's total consolidated debt, adjusted for acquisition obligations, was BRL7.8 billion by the end of June 2023, mainly comprised of debentures (65%) and working capital (around 20%). The parent company's debt was BRL3.2 billion (mainly of debentures), guaranteed by its subsidiaries.

Issuer Profile

Ambipar provides environmental services in Brazil (around 60% of the consolidated EBITDA), and the rest of Latin America, the United States, Canada and the United Kingdom, in two large segments: response (by mitigating and preventing environmental damage from accidents) and environment (by managing and recovering industrial waste from private clients.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

(C) 2023 Electronic News Publishing, source ENP Newswire