Fitch Ratings has affirmed Raizen S.A.'s and Raizen Energia S.A.'s (jointly referred here as Raizen) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB', as well as Raizen Fuels Finance S.A.'s senior unsecured notes due 2027 at 'BBB'.
In addition, Fitch has affirmed the National Long-Term Rating at 'AAA(bra)'. All Ratings Outlook are Stable.
Raizen's ratings reflect its strong market positions as the largest S&E player and the second largest fuel distributor in Brazil, with a qualitative growth strategy in renewable energy investments and access to end-users. The company's importance to its controlling shareholders, commitment to preserving robust liquidity, conservative credit metrics and strong financial flexibility, including relevant EBITDA, cash position and access to offshore undrawn committed credit facilities in hard currency, remain key rating factors.
Key Rating Drivers
Strong Market Positions: Raizen has a leading position in the S&E industry and is the second largest player in the Brazilian fuel distribution market. This combination gives it a unique business scale and diversification, differentiating it from its competitors operating in Brazil. The group is proportionally less exposed to some risks than other S&E players operating in Brazil, and has a stronger and more developed business strategy in renewables and international operations than other Brazilian fuel distributors.
Growth Perspective in Renewables: Raizen's business model provides a solid base to support growth and further diversification through investments in renewables and in the access to final clients. In the renewables front, the company will focus on increasing the production of biomass for power generation, second generation ethanol, non-fuel ethanol and biogas. In the access to final clients, the company will invest on expanding the number of convenience stores under the Shell Select and OXXO brands, digital sales penetration, logistics and commercial initiatives to move closer to final customers.
Strong CFFO: Raizen is expected to generate EBITDA and CFFO of BRL13.3 billon and BRL9.7 billion, respectively, in fiscal 2023, and BRL11.5 billion and BRL8.8 billion in fiscal 2024. This compares favorably with EBITDA of BRL8.4 billion and CFFO of BRL8.3 billion in fiscal 2022. For fiscal 2023, negative FCF is expected to be at around BRL1.3 billion, after annual investments around BRL10.5 billion. In its analysis, Fitch considers including average dividends of BRL1.6 billion per year. The flexibility to reduce dividend payouts to preserve Raizen's robust credit profile, if necessary, was also factored into the analysis.
Conservative Capital Structure: Fitch projects average gross and net leverage of 2.0x and 1.4x, respectively, over the next three years. Raizen acquired Biosev free of net financial debt and paid around BRL6.0 billion (BRL4.3 billion in cash and around BRL1.7 billion in shares), and raised BRL6.9 billion in an IPO. Shares were issued in Brazil with dual listing in the U.S. Raizen is expected to continue efficiently managing its foreign exchange (FX) exposure. With the exception of a small portion of notes due 2027, all debt is 100% swapped into BRL.
Strategic Importance for Shareholders: Raizen' ratings incorporate the implicit financial strength and potential support from shareholders. Raizen is the second largest downstream market for Shell globally and is a key vehicle for Shell's growth in the renewable energy sector. In addition, the company is Cosan's largest investment. Cosan has a diversified portfolio in other large companies operating in Brazil. The company also benefits from Cosan's expertise in the S&E business, as well as Shell's expertise in the fuel business.
Rating Pierces Country Ceiling: Raizen's 'BBB' Foreign Currency IDR is three notches higher than Brazil's 'BB' Country Ceiling, due to the following factors: estimated EBITDA in hard currency of about BRL1.7 billion, USD700 million of cash abroad, and USD1.0 billion of offshore undrawn committed credit facilities. Fitch projects the ratio of exports, plus cash held abroad and offshore committed undrawn credit facilities to cover hard currency debt service over the next 24 months by 2.7x, in line with Fitch's 'Rating Non-Financial Corporates Above the Country Ceiling Rating Criteria.' This allows the company to be rated up to three notches above the Brazilian Country Ceiling.
Credit Linkage: Raizen Energia' ratings reflect the high incentives that its controlling shareholder, Raizen, provide it support if necessary. Raizen has a stronger credit profile than Raizen Energia, and the application of Fitch's Parent and Subsidiary Linkage Rating Criteria has resulted in the equalization of the ratings. Raizen owns 100% of Raizen Energia, and legal, strategic and operational incentives are high. Raizen guarantees Raizen Energia's debt, and there are cross default clauses between the companies' debt. The sugar & ethanol business have strong growth potential and represented about 50% of Raizen's EBITDA in FY22.
Derivation Summary
Raizen's investment grade ratings reflect its unparalleled global leading position in the S&E industry allied with the diversification and cash flow resilience provided by their strong downstream business in Brazil. Raizen ranks as the 4th largest Brazilian Group in terms of net revenues with a conservative net leverage ratio and ample financial flexibility, including strong shareholders, Cosan and Shell.
Raizen's IDR's are one notch above Suzano S.A.'s (Suzano; 'BBB-'/Stable), Suzano is the world's leading producer of market pulp and is also the leading producer of printing and writing paper and the second largest paperboard producer in Brazil. Suzano has a stronger cash generation, has ample liquidity but the main difference is the net leverage of Suzano and its debt service in hard currency which are higher than Raizen's.
Raizen's IDR's are four notches above FS Agrisolutions Industria de Biocombustiveis Ltda (FS; BB-/Stable) as the latter has lower scale, is more exposed to commodity price risk compared with sugar cane processors, which rely on a market pricing mechanism that links sugar cane costs to commodity prices and has weaker liquidity than Raizen.
Key Assumptions
Diesel, Gasoline, Jet Fuel and Ethanol prices have been forecast to vary in tandem with a combination of oil prices and the FX rate. Brent crude prices have been forecast to average USD105/bbl in 2022 and USD85/bbl in 2023 whereas the Brazilian FX rate has been assumed to average BRL5.1/USD;
Sugar prices for fiscal 2023 and 2024 are based on currently hedged positions;
Crushed volume of 80 million tons in fiscal 2023 and 84 million tons in fiscal 2024;
In downstream, sales volume of 34.4 billion and 34.7 billion litres in fiscal 2023 and 2024, respectively;
Capex of BRL 10.5 billion in fiscal 2023;
Average payment of dividends of BRL1.6 billion per year.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Higher diversification of revenues in terms of business and geographies and net leverage ratio below 1.0x on a consistent basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of Brazil's ratings that results in a downward revision to the Country Ceiling;
Deterioration of capital structure due to excessive dividend payouts or large debt-financed acquisitions leading to net leverage ratio above 2.5x on a consistent basis;
Any evidence of a decrease in business importance to Shell.
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 '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-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Robust Liquidity: Raizen has a track record of maintaining a strong credit profile, underpinned by low leverage and robust liquidity position. Raizen reported readily available cash and marketable securities of BRL8.2 billion as of March 31 2022, excluding restricted cash, sufficient to cover debt maturities up to fiscal 2024. The company has BRL1.6 billion of debt due in the short term, net of derivatives according to Fitch calculations.
Raizen's liquidity is strengthened by unused revolving credit facilities of USD1.0 billion, from two syndicated transactions of international banks one of USD 300 million due in 2024 and another of USD 700 million due in 2026
Issuer Profile
Raizen is the leading Sugar & Ethanol (S&E) player in Brazil, responsible for producing around 15% and trading around 22% of the Brazilian S&E production and is the second largest fuel distributor in Brazil with a 22% market share in terms of volumes with presence in Argentina and Paraguay.
The company is jointly controlled by Shell (AA-/Stable) and Cosan S.A (Cosan; Long-Term Foreign Currency BB/Stable and Long-Term Local Currency BB+/National Long-Term rating AAA (bra)/Stable), who detain 50% of its voting shares each, the company is public listed and has a free-float of its non-voting shares, which represents around of 12% of its total capital.
Summary of Financial Adjustments
The following items have been excluded from EBITDA calculations:
Changes to the fair value of the company's biological assets;
Non-recurring items;
HACC effects and those coming from the impact of FX results on hedged sugar positions.
Debt position is net of FX derivative balances.
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
RAÍZEN S.A. 
