Fitch Affirms Localiza's IDR at 'BBB'; Outlook Stable

lunes 1 de diciembre de 2014 12:12 GYT

(The following statement was released by the rating agency) RIO DE JANEIRO/NEW YORK, December 01 (Fitch) Fitch Ratings has affirmed Localiza Rent a Car S.A.'s (Localiza) ratings as follows: --Foreign currency Issuer Default Rating (IDR) at 'BBB'; --Local currency IDR at 'BBB' --Long-term National Scale rating at 'AAA(bra)'; --5th debentures issuance, in the amount of BRL500 million, due in 2017, at 'AAA(bra)'; --6th debentures issuance, in the amount of BRL300 million, due in 2019, at 'AAA(bra)'; --7th debentures issuance, in the amount of BRL500 million, due in 2021, at 'AAA(bra)'. The Outlook for Localiza's corporate ratings is Stable. Localiza's 'BBB' rating reflects its distinguished and dominant business position within the car and fleet rental industries in Brazil, its strong operational efficiency, as well as its track record of conservative capital structure combined with robust liquidity levels. The company has demonstrated substantial flexibility to adjust its business model to consistently allow financial flexibility to withstand with changes in the economic cycle while preserving its healthy capital structure and credit metrics. Localiza's sizable pool of unencumbered fleet is also considered a robust source of liquidity. KEY RATING DRIVERS Competitive Advantages Support Strong Business Profile Localiza has a very strong competitive position with a market presence that is nearly five times larger than its closest competitor. The company's leadership gives it a strong negotiating power with the automobile manufacturers and enables it to efficiently dilute fixed costs. Localiza's prominent used car sales distribution channel further supports its competitive advantages and enhances financial and operational flexibility. Localiza's competitiveness is further strengthened by its low cost of financing and strong access to the local debt markets. Still Well-Positioned to Face Industry Risks Fitch's expects that Localiza's performance will weather the current environment of slower economic growth without significantly damaging its performance and credit metrics. Competition is likely to continue to increase, while inflation costs have already pressured Localiza's operating profitability. The company has the challenge to seek alternatives in order to partially offset some loss in operating margin as a result of its strategy of increasing market share by not passing along inflation to rental rates. Going forward, Localiza's solid business expertise and conservative approach to pricing will be fundamental to avoiding deterioration in its profitability on a potential deceleration in the used car market. In other words, Localiza's performance is partly connected to its pricing strategy for selling used vehicles. Lower Cash Flow Expansion; Decline in Operating Margins Localiza continued to improve its operating cash flow generation during 2014, although at lower rates. The combination of its sizable and matured operations with lower GDP growth and stronger competition has limited further business expansion. As of LTM Sept. 30, 2014, net revenues grew 15% from the same period in 2013, reaching BRL3.8 billion, while operating fleet growth was 2%. In the same period, EBITDAR and funds from operations (FFO) increased to BRL1.1 billion and BRL2.6 billion, respectively, compared with BRL1 billion and BRL2.3 billion. During 2012, these figures were BRL979 million and BRL2 billion, respectively. The greater costs for labor and store rentals have been pressuring Localiza's profitability, limiting scale gains. Over the same LTM, EBITDAR margin declined to 28.7%, but is still quite consistent with its historical range of 29% to 31%. Nevertheless, going forward Fitch foresees some decline in operating margins to between 26%-29%. Financial Flexibility Persists The car and fleet rental industries demand significant investments in fleet renewal to support business growth. The company has successfully developed an asset sales strategy that allows it to sell around 70,000 used vehicles per year. This has enabled Localiza to sell vehicles consistently, including during negative industry cycles and difficult economic environment. The proceeds from car sales have largely funded fleet renewal, given the significant discounts obtained from auto manufacturers for new vehicles. The potential market value of its relatively modern vehicle fleet is about 2.2x the value of its net debt. Localiza could monetize these assets in the event of a cash flow crisis, since they are not linked to any type of guarantees. During the LTM ended Sept. 30, 2014, capex for fleet renewal totaled BRL2.1 billion, and capex for growth reached only BRL39.7 million. Offsetting these disbursements, proceeds from used car sales totaled BRL2 billion. During the same LTM, Localiza reported a negative free cash flow (FCF) of BRL21.8 million, after BRL2 billion of capital expenditures and dividends of BRL348 million, which includes BRL250 million of extraordinary dividends paid during the 4Q'13. As the company is expected to continue to show moderate growth and pay solid dividends, FCF is expected to range from slightly positive to negative by about around BRL100 million during 2015. During 2013, FCF was negative by BRL18 million, while in 2012 it was positive by BRL139 million. During a tougher scenario for the industry, Localiza has the flexibility to improve its FCF generation by lowering its capex expenditures, as most of its capital investments are geared toward increasing the size of its fleet. Excluding capex related to expansion, Localiza generated BRL349,6 million of positive FCF during the LTM, a decline from BRL487,5 million in 2013. Proactive Liability Management/Robust Liquidity Localiza's management has adopted a conservative and proactive financial strategy to limit the risks associated with its exposure to the cyclical and capital intensive nature of its business. On Sept. 30, 2014, the company had cash and marketable securities of BRL1.3 billion and short-term debt of BRL246 million. Localiza's cash balance supports debt schedule amortization up to 2017. Localiza's sizable pool of unencumbered fleet is also considered a source of liquidity. As of Sept. 30, 2014, the company reported a fleet market value of approximately BRL2.9 billion, which corresponded to net debt coverage of 2.2x. Strong Credit Metrics The company has a track record of strong credit protection measures for the industry. From 2010 through the LTM ended Sept 30, 2014, Localiza's FFO-to-Adjusted Leverage averaged 1.2x, while the average for its total adjusted debt/EBITDAR ratio was 2.8x and its net adjusted debt/EBITDAR ratio was 2x. The company's debt consists primarily of debenture issuances (77%) and banking credit lines (23%). Fitch expects Localiza to keep its net adjusted debt/EBITDAR ratio below 2.5x during the next couple of years. RATING SENSITIVITIES A downgrade could occur as the result of a combination of higher leverage, with net leverage above 2.5x and lower liquidity, measured by cash to short-term debt below 1x, both on a sustainable basis. A negative economic outlook for Brazil or a significant deterioration of the used car market in the country could also lead to a downgrade. An upgrade is unlikely in the near term due to the industry's risks and volatility, and Localiza's large exposure to conditions in the macroeconomic environment. Contact: Primary Analyst Debora Jalles Director +55-21-4503-2629 Fitch Ratings Brasil Ltda. Praca XV de Novembro, 20 Centro - Rio de Janeiro - RJ CEP: 20010-010 Secondary Analyst Renato Donatti Associate Director +55-11-4504-2215 Committee Chairperson Ricardo Carvalho Senior Director +55-21-4503-2627 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available at ''. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (May 28, 2014). Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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