OREANDA-NEWS. February 16, 2015. Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) of America Latina Logistica S.A. (ALL) at 'BB-' and its National Scale long-term rating at 'A(bra)'. Fitch has also affirmed the ratings of ALL's subsidiaries and their respective unsecured debentures at 'A(bra)'. At the same time, the Rating Outlook for all corporate ratings is revised to Stable from Positive. A full list of the rating actions follows at the end of this release.

ALL's Rating Outlook revision follows the announcement on Feb. 11, 2015, that Conselho Administrativo de Defesa Economica (CADE) (the Brazilian antitrust authority) approved the merger of shares issued by ALL into Rumo Logistica Operadora Multimodal (Rumo), a subsidiary of Cosan Group. Fitch believes that the combined entity will enter into a new aggressive capex plan over the next few years, resulting in leverage ratios above Fitch's initial expectations for ALL in the coming years. The new entity should carry a net adjusted debt-to-EBITDAR ratio ranging 4.5x-5.5x during the next two years, compared with a ratio below 4.0x from 2015 onwards, previously projected by Fitch for ALL.

Fitch continues to see the merger of ALL with Rumo as positive for ALL's creditors in terms of Cosan Group participating in its shareholder structure. The merger will also allow the company to benefit from synergies between the two companies' logistics business model. The closing of the deal is pending the conclusion of an Agreement in Concentration Control (ACC). Through the ACC, the companies will adopt certain behaviors in order to eliminate competition concerns. The behavioral obligations under the ACC will remain in force for a period of up to seven years, primarily aiming to ensure equal service to rail freight transportation users, mainly through strengthening governance rules, adopting transparency on pricing criteria and limiting the use of rail freight transportation services by related parties.

ALL's ratings reflect the company's consistent cash flow generation through the economic cycle as well as its solid business position in the Brazilian railroad industry. The company's adequate financial flexibility and its evenly scheduled debt amortization program are also positive rating considerations.

KEY RATING DRIVERS

High Leverage; Decline is Not Expected So Far:
ALL's high leverage is expected to increase after the merger with Rumo. Fitch expects an aggressive capex program in the coming years mainly financed by debt in order to improve the new entity's operational capacity. On a pro forma basis, considering the last 12 months (LTM) ended Sept. 30, 2014, the combined entity net adjusted debt-to-EBITDAR ratio was 4.2x, while Fitch's current base case indicates that this ratio should increase to the range of 4.5x-5.5x during 2015 and 2016. These figures differ from Fitch's previous expectation of net leverage below 4.0x on a sustainable basis, as of year-end 2015. Fitch expects ALL will be able to start its deleveraging process as of 2017 when the capex matures. Pro forma total adjusted debt was approximately BRL12.4 billion at the end of September 2014.

Future FCF Trends Negative:
Despite the positive trend in the combined entity's combined funds from operations (CFFO), the expected substantial capex plan will add pressure on its cash flow and prevent it to generate positive free cash flow (FCF). Fitch believes the new entity's capex during 2015 and 2016 should substantially exceed our ALL's standalone capex forecasts of BRL900 million per year in the period. The new company will be challenged to consistently increase its operational cash flow in order to generate positive FCF after the investments mature.

Solid Business Position:
The ratings incorporate ALL's solid business position as the sole railroad transportation operator in the South and Mid-Western regions of Brazil, areas with high growth potential due to stable global demand for grain. Although ALL faced some operating challenges during 2013 and 2014, the long-term fundaments of its businesses remain strong. The company's operating model has demonstrated resilience to adverse global economic conditions through several cycles. The company has shown to be able to increase volumes transported in the last years, during diverse economic scenarios. Fitch understands that the merger with Rumo will strengthen ALL's business profile as it combines important operational logistics assets and new business opportunities to the rail operation under Cosan Group.

Adequate Liquidity & Well-Scheduled Debt Payments:
Fitch expects ALL to continue to show a conservative financial discipline after the merger with Rumo. On Sept. 30, 2014, pro forma cash and marketable securities was approximately BRL2.2 billion, while the combined company had BRL2.4 billion of debt due during the next 12 months. The exposure to refinancing risk is manageable, as reflected by its pro forma ratios of cash to short-term debt of 0.9x.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--The merger will occur during the first quarter of 2015;
--Mid-single digit revenues growth in 2015 and 2016; 20% revenue increase in 2017;
--EBITDA margin of about 42% in 2015; gradual increase to 47% in 2017 considering synergies and gains of scale;
--Capex substantially exceeds the BRL900 million per year from 2015 to 2017;
--Adjusted net debt to EBITDAR at the range of 4.5x-5.5x in 2015 and 2016.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

--Improvement in the combined entity credit metrics, with the adjusted net leverage trending below 4x in a sustainable basis;
--EBITDAR margin consistently above 45%.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Deterioration in the combined entity's operational performance, with declining volumes trend;
--Net adjusted leverage consistently above 5.5x, with no perspective to return to the historical levels.

Fitch has affirmed the following ratings:

ALL
--Long-term foreign and ocal currency IDRs at 'BB-';
--Long-term national tating at 'A(bra)';
--Long-term national rating of the 8th debenture issue at 'A(bra)';
--Long-term national rating of the 9th debenture issue at 'A(bra)';
--Long-term national rating of the 10th debenture issue at 'A(bra)'.

ALL Malha Sul S.A.
--Long-term national scale rating at 'A(bra)';
--Long-term national rating of the 3rd debenture Iisue at 'A(bra)'.

ALL Malha Norte S.A.:
--Long-term national scale rating at 'A(bra)';
--Long-term national rating of the 6th debenture issue at 'A(bra)';
--Long-term national rating of the 8th debenture issue at 'A(bra)'.

ALL Malha Paulista S.A.
--Long-term national scale rating at 'A(bra)';
--Long-term national rating of the 1st debenture issue at 'A(bra)'.

The Rating Outlook for the corporate ratings is revised to Stable from Positive.