RAÍZEN S.A. Fitch Ratings has affirmed FS Agrisolutions Industria de Biocombustiveis Ltda's (FS) Long-Term Local and Foreign Currency Issuer Default Ratings (IDR) at 'BB-', and its Long-Term National Scale rating at 'AA-(bra)'.
The Rating Outlook for the corporate ratings is Stable. Fitch has also affirmed at 'BB-' the senior secured notes issued by fully-owned FS Luxembourg S.a r.l guaranteed by FS.
The ratings incorporate FS's adequate business model and low cash costs in the volatile Brazilian ethanol industry. The high volatility of
The Stable Outlook reflects the expectation of a temporary increase of net leverage to close to 3.0x in fiscal year 2023, due to investments in the third industrial plant, followed by a quick reduction to below 2.0x in fiscal year 2024 with the start of the operations of the new plant.
Key Rating Drivers
High Price Volatility: FS is exposed to price volatility from corn, its main raw material, and ethanol, its main output. Corn prices adjust rapidly to global supply and demand imbalances and follow parity with
Weaker Corn and Ethanol Prices Correlation in the Short Term: Corn prices in
Adequate Business Model: FS's business model benefits from its sizable 1.4 billion liters of corn ethanol production capacity, strong corn supplies close to the industrial plants traded with price discounts in relation to CBOT and partial hedge provided by animal nutrition products that have strong correlation with corn regional prices. Fitch expects that revenues from animal nutrition products will provide the company with a satisfactory 48% coverage over corn costs in the long term. In fiscal 2022, coverage was 47% compared to 51% in fiscal 2021. The industrial plants are located in the
Low Cash Cost Producer: The company's cash cost structure is in line with some of the most efficient sugar cane producers. FS's efficient operational performance is able to deliver a yield around 430 liters of ethanol per ton of processed corn. FS produces and sells corn co-products used in animal nutrition whose prices tend to correlate with corn prices, helping to reduce the inherent price volatility. The company already fixed 97% of all of its expected corn needs for 2022/2023 at an average price of
Strong CFFO: FS is expected to generate EBITDA of
Positive FCF in Fiscal 2024: FS is expected to generate negative FCF of
Deleverage Capacity: FS's net leverage is expected to temporarily increase during fiscal 2023 due to investments in the new plant and estimated strong cash flow generation will support a quick deleveraging in fiscal 2024. FS's net debt/EBITDA should peak at 2.9x in fiscal 2023 and reduce to about 1.7x in fiscal 2024, as higher volumes from the new plant in Primavera do Leste kick in. In fiscal 2022, net leverage was 1.4x. The company reported total debt of
Derivation Summary
FS's IDR's are four notches lower than
FS's business model is similar to
FS's National Scale Rating is the same of
Key Assumptions
Ethanol sales volumes of 1.4 billion liters in fiscal 2023 and 1.9 billion liters in fiscal 2024 following investments in capacity expansion. Hydrous ethanol will make up 56% of total ethanol volumes going forward;
Sales of animal nutrition products of over 1.2 million tons in fiscal 2023 and near 1.7 million tons in fiscal 2024;
Ethanol prices to vary in tandem with a combination of oil prices and the FX rate. Brent crude prices have been forecast to average USD100bbl in 2022 and
Average FX rate at
Corn prices at
The company already fixed 97% of all of its expected corn needs for 2022/2023 at average price of
Animal nutrition products providing around 48% coverage for total corn costs;
Total investments of
Dividends of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Longer track record in different cycles of ethanol and corn prices;
FCF consistently positive, with the maintenance of conservative capital structure.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Deterioration in liquidity and/or difficulties refinancing short-term debt;
EBITDA margins below 20% on a sustained basis;
Net debt/EBITDA above 3.0x on a sustained basis.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined 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 (defined 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 '
Liquidity and Debt Structure
Satisfactory Liquidity: FS has satisfactory liquidity and financial flexibility. As of
FS has satisfactory financial flexibility to address upcoming maturities and diversified access to funding, banks and capital markets. Readily marketable inventories and offtake contracts with large fuel distributors improve financial flexibility; inventories can be easily monetized and accounts receivables can be used as collateral under new credit facilities, if required.
Issuer Profile
FS produces corn-based hydrous and anhydrous ethanol, dried distillers' grains with Solubles for animal nutrition, corn oil and energy from cogeneration. The company runs two plants in the
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 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.fitchratings.com/esg
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