OREANDA-NEWS. Fitch Ratings has affirmed Biosev S.A.'s (Biosev) foreign and local currency Issuer Default Rating (IDR) at 'BB-' and its national scale rating at 'A+(bra)'. Fitch has removed the Rating Watch Negative from Biosev's ratings and assigned a Negative Rating Outlook.

KEY RATING DRIVERS

The assignment of the Negative Outlook to Biosev's ratings incorporates the challenges the company still has over the new crop year to achieve free cash flow (FCF) break even and improve its credit profile amid a scenario of depressed sugar and ethanol (S&E) prices. The company will continue to invest in planting and crop care to improve agricultural yields and raise capacity utilization that translates into higher operating cash flows. Prices for S&E are expected to remain under pressure despite improvements on the ethanol industry dynamics in 2015 compared to 2014. The generation of more robust operational cash flow in the new season ending March 31, 2016 will also depend on the maintenance of favorable weather conditions as seen in early 2015.

The removal of the Rating Watch Negative incorporates Fitch's expectations that Biosev should continue to manage its liquidity issues in the short term through the access to medium- and long-term finances with financial institutions despite the increase in systemic risk for the Brazilian S&E sector. This challenging scenario has followed the default by Aralco S.A. Industria e Comercio and Virgolino de Oliveira S.A. Acucar e Alcool's (GVO) struggle to restructure its debt. Increased systemic risk has made it increasingly difficult for S&E companies to obtain long-term financing.

Biosev's ratings incorporates the company's persistent high leverage and its large crushing capacity combined with a differentiated business model built on clusters, which, together with its affiliation with Louis Dreyfus Commodities Holdings Group (LDCH Group) offers significant competitive advantages within the sugar & ethanol industry in Brazil. Fitch considers this affiliation as positive, as it brings operational and financial benefits to the company on top of its capacity to take advantage of LDCH Group's proven expertise in the global agricultural commodities market.

Weak Liquidity to Improve
Fitch expects Biosev to rebuild its cash position and improve its cash to short-term debt coverage ratio in fiscal 2015 as the strategy of building up inventories in expectation of higher ethanol prices during the offseason has paid off eventually due to the higher ethanol prices seen in January and February 2015. Fitch expects Biosev to report a cash position of around BRL2 billion in March 31, 2015 and some reduction of short-term debt following the selling of inventories during the fourth quarter of 2015 (4Q'15), inter-harvest period for the Brazilian sugar cane industry. As of Dec. 31, 2014, Biosev reported inventories of over BRL1 billion comprising 367,000 tons of sugar and 473 million liters of ethanol, up 47% and 39% from the same period of the previous year.

Biosev has retained access to medium- and long-term finances with financial institutions in 2015 despite the increase in systemic risk for the Brazilian S&E sector. In January, the company closed a three-year USD318 million (approximately BRL860 million) syndicated export prepayment facility with eight financial institutions. The loan matures in April 2018 and is secured by pledge of Biosev's sugar cane fields and product inventories. The company has also rolled over some other loans in 2015 with aims at improving debt maturity profile and easing the short-term pressure on its cash flows. As of Dec. 31, 2014, Biosev reported a cash position of BRL190 million unfavorably comparing with short-term debt of BRL1.9 billion to yield a 0.10x coverage. As of March 31, 2014, Biosev had reported a cash position of BRL1.8 billion and short-term debt of BRL2.1 billion. Biosev's inventories position doubled to BRL1 billion as of Dec. 31 2014 from BRL505 million as of March 31, 2014.

FCF is Under Pressure
Fitch expects Biosev to report negative FCF over the next crop years given the slow recovery of S&E prices and the maintenance of large investments needed to improve productivity of its cane fields and capacity utilization. In the latest 12 months (LTM) ended Dec. 31, 2014, funds from operations (FFO) and cash flow from operations (CFFO) amounted to BRL555 million and BRL528 million, respectively, which unfavorably compared to BRL725 million and BRL879 million reported for March 31, 2014. The decline in CFFO largely reflected the company's strategy of holding up S&E inventories in expectations of better prices towards the end of the 2014/2015 season. In the LTM ended Dec. 31, 2014, CFFO was not enough to cover the company's capex of BRL1.1 billion, leading to a negative FCF of BRL602 million.

Large-Scale and Business Clusters
Biosev has the second largest crushing capacity of S&E global industry (36.4 million tons spread over 11 mills) with prominent storage capacity for both products. Its hefty storage capacity allows the company to wait for more favorable moments to sell its products. The organization of its industrial and agricultural assets around clusters generates operating synergies as well as secures an adequate supply of sugar cane to its mills, helping to fend off potential competitors by imposing high entry barriers. The mills and cane fields are located in regions with access to good quality soil, being near Brazil's main consumer centers and having efficient logistics access to port terminals. The company produces a broad portfolio of products and some of its plants are able to export ethanol to the United States.

Fitch expects no acquisitions from Biosev in the short and medium term. After a series of acquisitions, the agency expects the new management to improve profitability of the current assets before moving to inorganic growth opportunities as it was in the past. Fitch views the profitability strategy at the current moment as positive and supportive to the current ratings.

Positive Affiliation with the LDCH Group
The affiliation with LDCH Group translates into positive synergies and gives Biosev access to a broad range of data and information on the current shape of the S&E global markets, inventory and demand levels for both products, price trends, and the performance of foreign currencies across the globe, among others. The LDCH Group is one of the main clients for the sugar produced by Biosev. The adoption of efficient risk management practices has been reflecting positively on the attractive level of hedged sugar prices and has also helped to reduce the impact of the recently FX volatility. Support from LDCH also comes in the form of advances received from the Group for future delivery of very high polarization (VHP) sugar. These proceeds are used in the financing of Biosev's working capital needs. This debt has lower refinancing risk when compared to regular bank debt due to its inter-company nature. Typically, intra-group sales amount to a range of 700,000 tons to 900,000 tons of VHP sugar per year.

High Leverage Expected to Fall
The ratings incorporate Fitch's expectation that Biosev will be able to reduce net adjusted leverage ratios to 4.5x in the coming seasons. In Fitch's view, the company's capacity to deleverage will depend largely on its ability to improve agricultural and industrial yields and reduce idle capacity of its mills in order to dilute fixed costs and benefit operational cash flow generation. More attractive S&E prices will also play an important role on future credit metrics. Meanwhile, Biosev has taken initiatives to increase EBITDAR margins, which included the closing of one mill (Jardest) and reduction of costs with personnel. In the LTM ended Dec. 31, 2014, net revenues amounted to BRL3.9 billion and EBITDAR reached BRL1.3 billion to deliver an EBITDAR margin to 34.7%, flat compared to fiscal year 2014 (FY14).

As of Dec. 31 2014, Biosev reported a total adjusted debt of BRL7 billion consisting of a revolving three-year export facility (BRL1.7 billion); restructured debt in the context of previous acquisitions (BRL1.6 billion); Notas de Credito a Exportacao (BRL978 million); export prepayments (BRL754 million); land lease agreements as per Fitch's internal calculations (BRL1.2 billion); inter-company loans (BRL217 million); and others with the remaining balance. As of Dec. 31, 2014, the company reported a net adjusted debt to EBITDAR of 5.1x comparing unfavorably with 4.1x reported for March 31, 2014, which is high for the current IDRs.

KEY ASSUMPTIONS

--Crushed volumes increasing at an average of 5% over the next seasons and with positive impact over utilization rates;
--Increases in agricultural yields;
--Product mix relatively unchanged compared to the 2014/2015 season;
--Average sugar prices at USD14 cents/pound in 2015/2016, USD16 cents/pound in 2016/2017 and flat at USD17 cents/pound from 2017/2018 on;
--Domestic ethanol prices keeping the historical correlation with international sugar prices.
--Biosev's continuing access to medium- and long-term finances.

RATING SENSITIVITIES

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

--Adjusted leverage, measured by net adjusted debt to EBITDAR, of 4.5x or above on a sustainable basis;
--Cash plus CFFO over short-term debt below 1.0x.

Although unlikely in the near term, future developments that may, individually or collectively, lead to a positive rating action include:

--Net adjusted leverage to levels of 3.0x or below, sustainably;
--More favorable business profile for the sugar and ethanol sector.