OREANDA-NEWS. Fitch Ratings has affirmed the foreign and local currency Long-term Issuer Default Ratings (IDRs) for Votorantim Participacoes S.A. (VPAR) and subsidiaries at 'BBB', and has revised the Outlook to Stable from Negative. A complete list of related rating actions follows at the end of this press release.

The revision of VPAR and Votorantim Industrial S.A. (VID) 's rating Outlooks to Stable from Negative is based on VID's improved credit metrics back to through-the-cycle levels supported by higher EBITDA generation while maintaining conservative financial discipline and a comfortable liquidity position. Fitch expects VID to maintain net leverage below 3.0x during the challenging operational environment for the cement business in 2015 and its new capex cycle. VID is expected to deleverage from 2016 onwards reaching net debt/EBITDA levels around 2.0x.

KEY RATING DRIVERS

Improved Credit Metrics

VID's net debt/EBITDA ratio declined to 2.3x as of Dec. 31, 2014 from 3.1x as of Dec. 31, 2013, due to a combination of improved pricing across many of its operations coupled with the sale of surplus energy within its metals division. The sale of surplus energy accounted for approximately BRL700 million of additional EBITDA generation and is an example of VPAR's commitment to reducing net leverage to around its target of 2.0x. Absent the energy sale, the VID's net leverage ratio was 2.5x not factoring-in the potential higher metal sales volumes as a result of using the sold portion of energy. Fitch expects net leverage will climb to above 2.5x in 2015 due to continued capital investments in its cement business during challenging economic conditions in Brazil and further currency exchange rate volatility. VID is expected to reduce net leverage through-the-cycle to below 2.3x by 2016 as capex levels reduce and cash flow generation improves. VID's FFO adjusted net leverage ratio was 3.0x during 2014 which represented significant improvement from 5.0x in 2013 and 4.5x in 2012.

Excellent Cement Business

Votorantim Cimentos (VCSA) is the key operating subsidiary of VID. It continues to be the backbone of the parent company's rating. VCSA accounted for 50% of VID's EBITDA and 71% of its net debt during 2014. VCSA's net leverage remained high in 2014 at 3.4x in 2014 compared to 3.3x in 2013 due to flat EBITDA growth, higher net debt levels, continued expansion capex programs in Brazil, and BRL depreciation during the year. BRL depreciation negatively impacted VCSA's leverage by 0.2x in 2014. VCSA's challenge in 2015 is to conduct its operations during continued higher capex spending in its Brazil operations coupled with lower expected domestic demand volumes, which will delay the deleveraging process. The anticipated lower sales volumes will be offset to some extent by VCSA's ability to increase cement prices.

VCSA has the ability to accelerate its deleveraging through the sale of non-core assets, restricting dividends to its parent VID, and other contingency plans which is has in place. During May 2014, VCSA received an unfavorable ruling from Brazil's anti-trust agency, CADE, that resulted in a BRL1.5 billion fine and the forced sale of certain assets. VCSA has appealed the ruling. The company will post guarantees during the appeal process, which is expected to extend beyond 2015.

Strong Market Pulp Position

VID owns 29% of Fibria Cellulose S.A. (Fibria, LT FC IDR rated 'BBB-'/Stable Outlook by Fitch), which is the world's largest producer of market pulp, with 5.3 million tons of bleached eucalyptus kraft market pulp capacity. The largest shareholder is BNDES Participacaos S.A. (BNDESPar) with 30.38% ownership. The shareholder agreement allows for VID to appoint the majority of board members, thus guiding the company's strategy. Fibria is among the lowest cost producers of pulp globally. Fibria's leading position is viewed as sustainable due to its ownership of 968,327 hectares of land in Brazil, upon which it has developed 561,220 hectares of eucalyptus plantations. The land had an accounting value of USD458 million, and forestry plantations on this land had an accounting value of USD1.415 billion. Fibria's sales volumes are more stable than most companies within the industry, as more than 50% are directed toward the tissue paper market. Fitch projects that Fibria will generate about USD1.1 billion of EBITDA and USD1.0 of FFO in 2015

Strong Growth Prospects in Mining

VID owns 50.06% of Compania Minera Milpo S.A. (Milpo), which is a low-cost polymetals miner based in Peru, with zinc accounting for 45% of its 2014 revenues, followed by copper (30%), silver (15%), lead (8%) and gold (1%). Cash flow generation at Milpo has historically been robust due to its low second quartile position on the global zinc cost curve. Milpo's consolidated cash cost of production increased to USD35.5 per metric ton (mt) of treated ore in 2014 from USD35 per mt in 2013 due to more maintenance and development costs anticipating the increased production capacity of 18,000 tpd in Cerro Lindo unit. This was partially off-set by the decrease in the production cash cost at El Porvenir and Atacocha which reflected the positive impact of the initiatives taken by the company such as optimization on consumption ratios, use of alternative technologies and higher scale underground machineries to increase productivity. Fitch links Milpo's credit strength to that of its parent as it is listed as a 'Material Subsidiary' for the cross-default and acceleration provisions on VID's debt. Milpo's net leverage ratio is expected to be around negative 0.2x in 2015.

Intercompany Debt Guarantees

Several cross-guarantee structures exist within the group which VID is unwinding in line with its strategy to have each subsidiary raise debt on a stand-alone basis. In March 2014, VPAR repurchased approximately USD900 million of notes due in 2019, 2020 and 2021 that were issued by VID, Voto-Votorantim Overseas Trading Operations IV Limited, and Companhia Brasileira de Aluminio, respectively. The note due in 2019, 2020 and 2021 were guaranteed by VPAR (100%), CBA (50%) and VCSA (50%); VPAR (100%), Fibria (50%) and VCSA (50%) and VPAR (100%) and VCSA (50%), respectively. VCSA has USD1.25 billion of notes due in 2041, EUR303 million of notes due in 2017, and BRL1.4 billion of outstanding financing with BNDES that have a 100% guarantee from VID, VPAR, and Hejoassu, respectively. Going forward, all new financing from BNDES to VCSA will not include any guarantees from VID. Approximately BRL13.5 billion of consolidated debt at the VID level has guarantees reaming from VID/VPAR to its subsidiaries as of Dec. 31, 2014. This represented approximately 56% of total consolidated debt at the VID level.

Strong Liquidity

VID had BRL24 billion of total debt and BRL7.4 billion of cash and marketable securities as of December 31, 2014. VID faces amortizations of BRL1.5 billion during 2015 and BRL2.2 billion during 2016. BRL exposure increased to 43% as of December 31, 2014 from 38% as of December 31, 2013 to better match cash flow with debt service repayment as part of VID's liability management. Current cash on hand can cover approximately 36 months of debt amortization. VID has strong capital market access in both Brazil and abroad.

Solid Operating Cash Despite High Capex Levels

VID's cash from operations (CFO) grew to BRL4.6 billion in 2014 from BRL1.3 billion in 2013 due to strong operational performances across its business segments. As a result free cash flow (FCF) was BRL1.6 billion after being negative the last several years. Capital expenditures remained high at BRL2.4 billion, as VID's business continue to invest in expansions, particularly within the cement division. VID plans to continued high investments in its cement business within the northeast and Midwest regions of Brazil, where cement demand is high coupled with investments in brownfield and greenfield projects at Milpo. As a result, Fitch projects FCF to return negative in 2015 due to the continued investments.

Related Ratings

The main subsidiaries of VPAR that are not part of VID are the group's 50%/50% orange juice joint venture and Votorantim Finance, which is the holding company for Banco Votorantim, which is 49.9% owned by Banco do Brasil (BdB) and is rated
'BBB-'. Analytically, Fitch strips away the financial metrics of VF from VPAR's consolidated figures and focuses on the standalone credit metrics of VID.

RATING SENSITIVITIES

Negative Rating Action: VPAR and VID's ratings could be negatively affected by a significant deterioration in the global macroeconomic and business environment, resulting in declining profitability and weaker credit metrics or significantly higher levels of capex, leading to long periods of negative FCF. Fitch could also downgrade the group if sustained net leverage is above 2.5x through the end of the investment and commodity demand cycle.

Positive Rating Action: A rating upgrade for VPAR and VID is not likely due to the challenges the group will face to deleverage its balance sheet upon the unfavorable economic environment coupled with the constraining of Brazil's country ceiling. However, factors leading to the consideration of a Positive Outlook or upgrade include lower absolute and relative debt levels for a prolonged period resulting in improved credit metrics. Fitch would view sustained net leverage below 2.0x by 2016 as favorable.

Fitch affirms the following:

Votorantim Participacoes S.A. (Votorantim)
--Foreign and local currency Issuer Default Ratings (IDRs) at 'BBB';
--National scale rating at 'AAA(bra)'.

Votorantim Industrial S.A. (VID)
--Foreign currency IDR at 'BBB'.

Companhia Brasileira de Aluminio (CBA)
--2019, 2021, and 2024 guaranteed notes at 'BBB'.
Voto-Votorantim Overseas Trading Operations IV Limited
--2020 notes at 'BBB'

KEY ASSUMPTIONS

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

--Low negative revenue growth in 2015 and single digit positive growth in 2016 - 2018;
--2015 Cement volumes of -2.5% growth in Brazil, -2.0% growth in Europe/Asia, and 3% growth in North America, with low positive growth rates for each region from 2016 - 2018;
--No additional surplus energy sales in the aluminum division;
--EBITDA margin between 22 - 25%;
--Capital Expenditures of BRL3.6 billion in 2015;
--Net Leverage to climb above 2.50x in 2015 and deleveraging in 2016;
--Maintaining strong liquidity position.