JSL S A : Fitch Affirms Simpar, JSL and Vamos Ratings; Outlook Revised to Positive

4/15/2021

Fitch Affirms Simpar, JSL and Vamos Ratings; Outlook Revised to Positive

RATING ACTION COMMENTARY

Fitch Af rms Simpar, JSL and Vamos Ratings; Outlook Revised to Positive

Thu 15 Apr, 2021 - 4:41 PM ET

Fitch Ratings - Rio de Janeiro - 15 Apr 2021: Fitch Ratings has af rmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of Simpar S.A. and JSL S.A. at 'BB-' and the Long-Term National Scale Ratings of Simpar, JSL and Vamos Locacao de Caminhoes Maquinas e Equipamentos S.A. at 'AA-(bra)'. At the same time Fitch also af rmed Simpar Europe's and Simpar Finance S.a.r.l.'s senior unsecured debt ratings at 'BB-'. The Outlook was revised to Positive from Stable.

The Positive Outlook re ects expectations Simpar will continue to strength its operational cash generation and manage its consolidated leverage at more moderate levels. Simpar's ratings re ect its strong business pro le, leading position in the Brazilian logistics industry and diversi ed service portfolio.

The group bene ts from long-term contracts with medium to large corporate clients for a signi cant part of its revenues and a track record of resilient operating performance throughout economic cycles. The ratings incorporate the group's strong growth strategy, which is partially mitigated by its above-average nancial exibility, adequate liquidity and well spread debt amortization pro le.

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4/15/2021

Fitch Affirms Simpar, JSL and Vamos Ratings; Outlook Revised to Positive

KEY RATING DRIVERS

Strong Market Position: Simpar has a leading position in the Brazilian logistics industry with a diversi ed portfolio of businesses and a presence in multiple sectors of the economy. The group's strategic and operational nature of the service it provides, coupled with long-term contracts for most of its logistic and heavy vehicle rentals, minimizes its exposure to more volatile economic cycles.

The group's signi cant operating scale has made it an important purchaser of light vehicles and trucks, giving it signi cant bargaining power relative to peers. JSL Logistica focuses on supply chain management and transportation, Movida Participacoes S.A. (BB-/Stable) on light vehicles and eet rental, Vamos on heavy vehicles and equipment rentals, and CS Brasil Participações e Locações on eet rental for the public sector.

Robust EBITDA: The base case scenario for Simpar presents expected strong and growing consolidated EBITDA based on recent acquisitions, organic growth and improving margins. Movida and Vamos should be the most important contributors to the EBITDA expansion in 2021, as these two businesses regain traction after the worst period of the 2020 lockdown restrictions. JSL Logistics will continue to grow, improve margins and become a more asset light operation. Simpar should reach consolidated EBITDA at BRL2.8 billion (23% margin) in 2021 and BRL3.6 billion (24%margin) in 2022, from BRL2.1 billion (22% margin) in 2020.

Moderate Leverage: JSL's follow-on in 2020 and Vamos' IPO in 2021 raised BRL2 billion in equity, enhancing the group's ability to conciliate its growth strategy with a sound capital structure. A continued improvement in the operating margins of the logistics and vehicle rental business is important to temper medium-term leverage. Simpar's consolidated net leverage, measured by total net debt/EBITDA, should be around 3.5x from 2021 to 2023, comparing with an average of 4.3x in the last four years.

Manageable Negative FCF: FCF should remain negative, on average, at BRL2.6 billion from 2021 to 2023, pressured by annual average capex of BRL3.4 billion. Cash ow from operations (CFFO) should range between BRL960 million and BRL1.1 billion during this period, bene tting from growing EBITDA. CFFO was BRL2.0 billion in 2020, while FCF was negative at BRL1.5 billion after capex of BRL3.8 billion.

Strong Parent and Subsidiary Linkage: JSL's and Vamos' ratings re ect the companies' strong legal, operational and strategic link with controlling shareholder, Simpar (HoldCo), according to Fitch's Parent and Subsidiary Rating Linkage Criteria, which equalizes the ratings of the three companies. In addition to relevant ownership, Simpar guarantees some of both companies' debt, which, in some cases, also have consolidated nancial covenants.

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4/15/2021

Fitch Affirms Simpar, JSL and Vamos Ratings; Outlook Revised to Positive

Companies also bene t from important commercial synergies, such as greater bargaining power when buying vehicles and negotiating with customers. At Simpar, board control and relevant ownership stakes in its operating companies also mitigate the structural subordination of its debt, with no upstream dividends or intercompany loans restrictions that a majority board vote cannot overcome.

DERIVATION SUMMARY

Simpar's bargaining power and business position tend to be relatively closer to Localiza Rent a Car S.A. (BB/Negative), and much stronger than that of Ouro Verde Locacao e Servico S.A. (BB-/Stable). Compared with Localiza, Simpar has a weaker nancial pro le with higher leverage and more pressured FCF. Compared with Ouro Verde, Simpar has higher leverage and a similar liquidity position but a much better business pro le and access to credit markets. Compared to Rumo S.A. (BB/Negative), both companies share similar business risks, considering their respective business traits, but Simpar's leverage is higher.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Its Rating Case for the Issuer Include

• Average consolidated annual revenue growth at 20% from 2021 to 2023;
• Consolidated EBITDA margins at 24%, on average, from 2021 to 2023;
• Consolidated net capex at around BRL3.4 billion, on average, from 2021 to 2023;
• Cash balance remains sound compared with short-term debt;
• Dividends at 25% net income;
• No large-scale M&A activity or equity sale.

RATING SENSITIVITIES

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4/15/2021

Fitch Affirms Simpar, JSL and Vamos Ratings; Outlook Revised to Positive

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

• Consolidated net adjusted debt/EBITDA below 3.5x on a sustainable basis.
• Strengthening of the company's scale and pro tability, without further deterioration of its's capital structure.

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

• Limits to Simpar's unrestricted ability to access the operating companies' cash;
• Failure to preserve liquidity and inability to access adequate funding;
• Prolonged declines in demand coupled with the company's inability to adjust operations;
• Consolidated net adjusted leverage above 4.5x on a sustainable basis;

-- Material deterioration in the group's eet rental and logistics businesses.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (de ned as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (de ned as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-speci c best- and worst-case scenario credit ratings, visit https://www. tchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Strong Liquidity: Simpar's robust liquidity position is a key credit consideration, with cash covering short-term debt by an average of 1.8x during the last four years. The group's expected negative FCF, a result of its growth strategy, will be nanced by debt in the rating scenario. Simpar had BRL5.8 billion of cash and equivalents and BRL14.2 billion of total

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4/15/2021

Fitch Affirms Simpar, JSL and Vamos Ratings; Outlook Revised to Positive

adjusted debt (11% secured), with BRL2.0 billion due in the short-term (3.2x cash coverage ratio) as of December 2020.

The group's debt pro le is mainly comprised of local debentures, promissory notes and CRA issuances (64%) and bond issuances. Simpar's nancial exibility is also supported by the group's ability to postpone growth capex to adjust to the economic cycle and to the considerably number of the group's unencumbered assets, with a book value of eet over net debt at 1.5x.

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.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of Environmental, Social and Corporate Governance (ESG) Credit Relevance is a Score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www. tchratings.com/esg.

Simpar

Finance S.a.r.l.

• senior	LT	BB-	Af	rmed	BB-
unsecured
Vamos	Natl	AA-(bra) Rating Outlook Positive	Af	rmed	AA-
Locacao de	LT				(bra) Rating
Caminhoes,					Outlook
Maquinas e					Stable
Equipamentos
S.A.
• senior	Natl	AA-(bra)	Af	rmed	AA-(bra)
unsecured	LT

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