OREANDA-NEWS. July 14, 2015. Fitch Ratings has affirmed Corporacion Azucarera del Peru S.A.'s (Coazucar) Local & Foreign Currency Issuer Default Rating (IDR) and senior unsecured notes at 'BB'.

The Rating Outlook is Negative.

KEY RATING DRIVERS

Negative Outlook:
Coazucar's Negative Outlook reflects the pressure over liquidity and free cash flow (FCF) due to the capex commitment of about USD200 million for the completion of the Olmos greenfield project mainly over 2015-2017 period. The company has paid USD8 million-USD9 million for Olmo's water resources since November 2014 and cash generation from this project is not expected before the second half of 2016.

Strong Equity Holder:
Coazucar's shareholders have demonstrated their financial commitment to the company's liquidity. In September 2014, Coazucar's shareholders injected USD30 million of equity cash into the company and USD26.2 million in related debts were converted into equity. In addition, USD24 million in assets were provided by the owners for the Olmos greenfield project which includes a USD9 million production plant. Fitch factors potential support from the shareholders into its rating and believes cash will continue to be injected if liquidity deteriorates. Coazucar is part of a conglomerate of companies owned by the Rodriguez Family and split evenly between the two brothers. The conglomerate has leading business positions in the cement and dairy industries in Peru and surrounding regions.

Increased Leverage and FX Exposure:
Coazucar's gross leverage (total debt/EBITDA adjusted by dividends paid to minority shareholders fell to 5.1x at LTM March 2015 from 5.9x in 2014 and 5.5x in 2013. Fitch expects gross leverage to remain at above 4.0x in the next two years as FCF would be negative due to high capex for the Olmos greenfield project. After the completion of the project, Fitch expects to see deleveraging even at currently low sugar prices. Coazucar's total debt of USD477 million as of March 2015 is mainly related to the USD325 million unsecured notes due on August 2022. Most of the debt is dollar denominated without any hedge against local currency depreciation, which Fitch considers a risk factor.

Volatility of Earnings:
The ratings incorporate risks associated with product concentration in sugar, which represented 83% of Coazucar's revenues in 2014. By nature, the sugar industry is volatile and exposed to fluctuations in commodity prices and external factors such as the event risk associated with the natural phenomenon El Nino. During the LTM ended March 31, 2015, adjusted EBITDA was around USD100 million with a margin of 20.3%, similar to 2013, due to lower prices but higher volumes. Fitch expects Coazucar's EBITDA margin to be around 21%, in line with the depressed sugar prices, cost savings and improvement in efficiencies. Although the company's price gap between its brown and white sugar premium prices in Peru compared to international prices has shown a recovery since fourth quarter 2014, it is considered as volatile. However, the group EBITDA margin is likely to benefit slightly with the white refined sugar production coming from the Coazucar's new refinery located in Casa Grande in Peru.

Strong Business Position in Peru:
Coazucar is geographically concentrated in Peru (68% of total revenues and 82% of EBITDA in 2014). It is the largest sugar producer in Peru, controlling around 46% of market share in the country. It has a low cost structure and still high operating margins (though lower than Brazilian peers which are more diversified into ethanol) that stem from its proximity to owned sugarcane fields, a lower dependence on third-party producers, and some of the world's highest sugar cane yields per hectare as a result of its favorable geographic location that allows for a continuous growing period. Coazucar's operations in Ecuador and Argentina diversify its production base and expand its sugar offering with white/organic sugar, but with lower sugar cane yields and profitability and higher sovereign risk than Peru.

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

--Olmos project starts production in second half of 2016 adding annual production of 120,000-130,000 tons of sugar;
--Average sugar prices at USD14 cents/pound in 2015, USD16 cents/pound in 2016 and USD17 cents/pounds from 2017 onwards;
--Capex for Olmos project: USD200 million for 2015-2017;
--Capex for maintenance: USD20 million per year;
--Dividends for non-controlling shareholders at the subsidiary level: USD6.25 million per year; --EBITDA margin at around 21%;
--Potential equity injections to preserve liquidity while completing the Olmos project.

RATING SENSITIVITIES
A negative rating action could occur if the group's liquidity position deteriorates due to increased capital investment or lower margin without any tangible support from its shareholder. A downgrade could occur if Fitch believes Coazucar's net leverage will exceed 4.0x after 2017.

An Outlook revision to Stable could occur if Coazucar improves its pricing power, reduces leverage and improves cash flow through the investment cycle. Tangible support from the shareholder that improves liquidity and lowers leverage also could lead to positive rating actions.

LIQUIDITY
As of March 31, 2015, the company had USD88 million in cash which covered adjusted short-term debt of USD54 million by 2.4x, which compares favorably with 1.9x and 1.3x in 2014 and 2013, respectively.. Coazucar's debt amortization schedule is manageable, as most of its debt is due in 2022.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the ratings for Corporacion Azucarera del Peru S.A. as follows:

--Local and Foreign IDR at 'BB';
--Senior unsecured debt at 'BB'.