OREANDA-NEWS. July 01, 2015. Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) and Local Currency Default Rating of InterCement Participacoes S.A. at 'BB', and the Long-Term National Rating at 'AA-(bra)'. The Outlook has been revised to Negative from Stable. A full list of rating actions follows at the end of this release.

The Negative Outlook reflects the deterioration in InterCement's credit metrics, significant EBITDA margin compression, and continued difficult operating conditions over the next 12 - 18 months.

KEY RATING DRIVERS

Weakening Credit Metrics

InterCement's credit metrics have suffered materially over the last 12 months due to difficult operating environments in its key markets resulting in significantly lower EBITDA generation, despite improvements in consolidated sales. Increased maintenance, input, and logistics costs have put downward pressure on InterCement's EBITDA, resulting in net leverage sustained above 4.0x, despite a decline in gross debt levels. Fitch projects InterCement to have a difficult time improving its credit metrics through operational cashflow generation. Fitch projects net leverage to be approximately 4.2x by year end 2015.

Deteriorating EBITDA Margins

InterCement's EBITDA margins were 19% for 1Q15 compared to 21% in 1Q14. First quarter margins were negatively impacted by lower cement consumption in Brazil, high energy costs, and difficulties passing on costs to consumers. InterCement's biggest market, Brazil, has undergone a severe economic contraction, resulting in a 12% decline in cement and clinker volumes 1Q15 over 1Q14. Fitch projects consolidated EBITDA margins to remain around 22% during 2015, as any cost cutting and operational efficiencies will likely not be fully realized by year end.

Severe Contraction in Brazil's Cement Market to Persist

Historically, the Brazilian market has contributed approximately 55 - 60% to InterCement's consolidated EBITDA. InterCement's Brazilian operations generated only 33% of the company's consolidated 1Q15 EBITDA as a result of lower demand levels, higher costs, and continued asset optimization expenses from the Cimpor acquisition in 2012. Fitch expects limited improvement in InterCement's Brazilian operations for the rest of 2015, as unfavorable economic conditions are expected to persist for the next 12 - 18 months.

Adequate Liquidity Profile

Fitch views the company's debt amortization schedule as manageable and its cash position as adequate. As of March 31, 2015, InterCement had EUR903 million of cash and marketable securities. The company's debt repayment schedule is manageable with EUR158 million and EUR183 million of debt amortization through 2015 and 2016, respectively. Approximately 67% of InterCement's debt is exposed to variable interest rates, and 51% of its debt is denominated in Euros. InterCement typically hedges 24 months of its short-term maturities through derivative contracts.

Credit Linkage with Corporate Group Incorporated

The ratings factor in InterCement's strong credit linkage with its holding company, Camargo Correa (BB/RWN), one of the largest Brazilian privately owned conglomerates. InterCement is viewed as the backbone for Camargo's credit profile as this division accounts for 31% of Camargo's consolidated revenues and 42% of its EBITDA during 2014.

The Camargo Correa group was one of 23 groups that have temporarily been banned from future bids or projects with Petrobras. Senior members of Camargo's engineering and construction subsidiary were incarcerated as a result of the Lava-Jato investigation, including the CEO, Vice President and Chairman of the Board. The engineering and construction division accounted for less than 15% of the consolidated EBITDA of the group during 2014.

Solid Business Position with a Diversified Portfolio

The ratings reflect Intercement's business market position as a major global player with a solid market position in key regional markets with operations in South America (Brazil, Argentina and Paraguay), Europe (Portugal) and Africa (Egypt, Mozambique, South Africa and Cape Verde). Fitch views the company's business position as sustainable in the medium term based on its leading business position in market that present high-growth profile, strong brand recognition, scale of operations and continued synergies realized following the 2012 Cimpor acquisition, and the strategic location of its cement facilities and quarries.

InterCement ranks as the 7th largest cement company in the world with total consolidated cement sales of 30 million tons during 2014, and is the second biggest player in the Brazilian market with a market share of 18%, measured by cement sales. The large scale of operations provides InterCement with competitive advantages, principally meaningful cost-efficiencies and integrated logistics. The company maintains a diversified portfolio of operations with cash flow generation, measured by EBITDA, from Brazil, Argentina and Paraguay, Portugal and Egypt representing 53%, 19%, 7%, and 7%, respectively, of its total EBITDA in 2014.

KEY ASSUMPTIONS:
--9.0% decline in Brazilian volumes;
--2.0% decline in consolidated volumes sold;
--Net Leverage around 4.2x in 2015, declining to 3.2x in 2016 and below thereafter;
--Stable liquidity profile.

RATING SENSITIVITIES

Negative Rating Action: Fitch would view a combination of the following as negative to credit quality: the company's inability to reduce and maintain its net leverage to 3.5x or below within the next 12 - 18 months, further compression of EBITDA margins resulting in further cash flow generation loss, deterioration in InterCement's liquidity profile, and/or inability to restrict its discretionary expenses during the current difficult operating period.

Positive Rating Action: A rating upgrade is unlikely over the mid-term. Factors that could lead to a revision of the Outlook to Stable include: faster than expected deleverage to below 3.5x on a sustained basis, consistent free cash flow generation used to pay down gross debt levels, and/or improve macroeconomic trends in Brazil. An upgrade is also unlikely until the ramifications of the Lavo Jato investigation become more clear.

LIQUIDITY AND DEBT STRUCTURE

InterCement maintains adequate liquidity and a manageable debt amortization profile. InterCement reported cash and cash equivalents of EUR903 million compared to total debt of EUR3.8 billion as of March 31, 2015. A majority of InterCement's marketable securities are held in highly liquid short-term investment vehicles with major banks. InterCement has no material amortizations upcoming before 2019. Total debt is further broken down as 62% bank debt, 22% as debentures, and 16% as capital market debt.

FULL LIST OF RATING ACTIONS

Fitch affirms the following:

InterCement Participacoes S.A.
--Long-Term Local Currency IDR at 'BB'
--Long-Term Foreign Currency IDR at 'BB';
--Long-Term National Rating at 'AA-(bra);

InterCement Brasil S.A.
--Long-Term Local Currency IDR at 'BB';
--Long-Term Foreign Currency IDR at 'BB';
--Long-Term National Rating at 'AA-(bra);

Cimpor Financial Operations B.V.
--Long-Term IDR at 'BB';
--Senior Unsecured Notes unconditionally guaranteed by InterCement Brasil S.A. due 2024 at 'BB'.

Fitch has withdrawn Cimpor Financial Operations B.V.'s 'BB' long term local currency IDR. The agency will no longer provide corporate ratings for financial vehicles, only for their respective issuances and guarantors.

The Rating Outlook is Negative.