Fitch Ratings has affirmed Inpasa Agroindustrial S.A (Inpasa) Long-Term Local and Foreign Currency Issuer Default Ratings (IDR) at 'BB-', and its Long-Term National Scale rating at 'A+(bra)'.
The Rating Outlook is Stable.
The ratings reflect Inpasa's large-scale operations and low production cash cost in the volatile Brazilian ethanol industry. The high volatility of
Inpasa's cash flow generation capacity should improve as the company increases its crushing capacity and the ratings incorporate the expectation of negative FCF in 2022 due to expansionary investments, with a quick recovery in 2023 as the expansion project starts operations. Inpasa's adequate liquidity and more concentrated debt amortization profile were also considered in the analysis.
The Stable Outlook reflects the expectation that net leverage should reduce to below 1.0x in 2023, supported by higher sales volume.
Key Rating Drivers
High Price Volatility: Inpasa 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 in Short Term: Corn prices in
Large Scale Corn-Based Ethanol Producer: Inpasa's business model benefits from its sizable ethanol production capacity. The company's cash flow generation should improve over the rating period, as the company increases its crushing capacity to 6.5 million tons and annual ethanol production capacity to 2.9 billion liters by the end of 2023, making Inpasa Brazil's largest corn-based ethanol producer.
The new plant in Dourados,
Competitive Cost Structure: Inpasa is the most efficient corn-based ethanol producer in the country and its cash cost structure is in line with some of the most efficient sugar cane producers. The company produces and sells DDGS and corn oil, the prices of which tend to correlate with corn prices, providing a natural hedge against corn price volatility. The expected 55% coverage of corn costs provided by animal nutrition products from 2022 to 2024 is high in for industry standards. The average cost of the corn was around
Strong Operating Cash Flows: Inpasa is expected to generate EBITDA of
Low Leverage: Fitch expects Inpasa to preserve net leverage at low levels during its new investment cycle. Inpasa's net debt/EBITDA should temporarily increase to 1.6x in the end of 2022 and reduce to below 1.0x in 2023, as volume increase. This compares with 1.1x in 2021. Initially, the company's growth in
Derivation Summary
Inpasa's IDR's are four notches lower than
Inpasa's business model is similar to FS Ltda. (FS; BB-/Stable, National Scale AA-[bra]/Stable) and both companies are low-cost producers, with capacity to produce ethanol with cash cost comparable with
Inpasa's National Scale Rating is one notch below that of
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Ethanol sales volumes of 2.0 billion liters in 2022 and 2.9 billion liters in 2023 following investments in capacity expansion. Hydrous ethanol will make up 75% of total ethanol volumes going forward.
Sales of animal nutrition products of 1.2 million tons in 2022 and over 1.5 million tons in 2023.
Ethanol prices to vary in tandem with a combination of oil prices and the FX rate. Brent crude prices have been forecast to average
Corn prices at
Average FX rate at
Animal nutrition products providing more an average 55% coverage for total corn costs.
Total investments of
Dividends equivalent of 25% of net profit as from 2022.
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;
Improved liquidity and positive track record in accessing the banking and capital markets.
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 sustainable basis;
Net leverage above 3.0x on a sustainable 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
Improving Liquidity: Inpasa's liquidity has improved, but the company will need to increase bankability and access to the capital markets with long-term credit facilities to finance working capital and investments on a sustainable basis. As of
Corn inventories and offtake contracts with large fuel distributors reduce refinancing risks and improve financial flexibility; inventories can be easily monetized and accounts receivables can be used as collateral under new credit facilities, if required.
Issuer Profile
Inpasa produces corn-based hydrous and anhydrous ethanol, dried distillers' grains with Solubles for animal nutrition, corn oil and energy from cogeneration. The company runs three plants with total capacity to crush 4.5 million tons of corn and produce 2.0 billion liters of ethanol annually.
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
Inpasa has an ESG Relevance Score of '4' for Governance Structure due to lack of board independence and effectiveness. Inpasa has no independent members on the board and one-man risk is present, as decision making is highly concentrated in the hands of the founder and main shareholder. The ESG Relevance Score of '4' has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
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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