OREANDA-NEWS. S&P Global Ratings said today that it had assigned its 'BB' global scale corporate credit rating to JSL S. A. The outlook is negative.

"The rating reflects the company's position as one of the largest logistics service providers in Brazil, with diversification into light vehicle rental and fleet management," said S&P Global Ratings credit analyst Marcus Fernandes. "The company's operating efficiency also highlights JSL's ability to adequately price its contracts, and sell used vehicles through its integrated vehicle sale structure, including new and used vehicle dealerships."

We expect such efficiencies and competitive advantages to continue supporting our view that JSL will keep expanding its business over the next few quarters, although at a more conservative pace than historical average due to Brazil's economic slump.

Nevertheless, we expect JSL would face difficulty to improve its financial metrics, given our expectations of still high interest rates that can reduce the profitability of the company's contracts in the short term. As a result, we expect JSL's interest coverage and FFO-to-debt metrics to remain pressured for the 'BB' rating category over the next few quarters, close to 1.5x and 12%, respectively.

Our analysis of JSL's business risk profile is based on the company's scale of operation in the Brazilian market, the long-term profile of its contracted position, and operating efficiency given its diversification into synergic businesses, such as logistics, car and fleet rental, and vehicle dealerships. We expect JSL to continue benefiting from such a diverse portfolio of services in the short term, because we believe the company would continue capturing new service contracts despite the weak market conditions in Brazil.

We do, however, expect JSL will face challenges to maintain its historical profitability level. That's because high interest rates would reduce the profitability of the company's legacy contract portfolio, while new contracts would incorporate higher rates and stronger competition. Also, maintaining high utilization rates and improving profitability at Movida, JSL's car rental subsidiary, will prove difficult, given our expectations of still limited corporate travel volume and declining traffic for leisure travel.

JSL's financial metrics are likely to continue reflecting the company's historically aggressive growth strategy over the next few quarters, given that it funded its growth mainly with debt. The more conservative growth plan for the next few quarters should allow JSL to slowly improve its free operating cash flow (FOCF) generation and start reducing its leverage, with debt to EBITDA of about 4.0x by the end of 2016. However, the still high interest rates in Brazil are likely to continue weighing on JSL's funds from operations (FFO) generation and interest coverage ratios, because we expect FFO to debt of about 12%, and EBITDA interest coverage of about 1.5x.

Mr. Fernandes added: "The negative outlook reflects our expectations that the company's credit metrics will remain pressured for the 'BB' rating category, given that we believe interest rates will remain high through the end of 2016. However, we expect the company to improve its cash generation slightly through the year, due to its more conservative growth strategy. Under such a scenario, debt to EBITDA would remain around 4.0x and FFO to debt at about 12% over the next 12 months."

We could downgrade JSL if market conditions further weaken, resulting in either increasing delinquency rates or persistently high financial costs, leading to debt to EBITDA consistently above 4.0x, FFO to debt close to 12%, and an FOCF shortfall. A negative rating action on the sovereign rating could also trigger a rating downgrade on JSL, given its high risk exposure to the Brazilian domestic economy.

An upgrade is currently unlikely, given our low expectation of significant improvements in Brazil's macroeconomic environment. However, we could revise the company's outlook to stable if JSL posts stronger-than-expected financial metrics through higher operating efficiency, such as debt to EBITDA consistently below 4.0x, FFO to debt above 20%, and positive FOCF generation.