OREANDA-NEWS. March 28, 2016. Fitch Ratings has downgraded the ratings on Libra Terminal Rio S.A. (Libra Rio) as follows:

--Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BB' from 'BB+';
--National Scale Rating to 'AA-(bra)' from 'AA(bra)';
--Senior unsecured debentures issuance of BRL270 million due 2019 to 'AA-(bra)' from 'AA(bra)'.

The Rating Outlook is Negative.

Libra Rio's ratings incorporate the analysis of the Libra group on a consolidated basis. In Fitch's view, there are strong operational and financial linkages between the issuer and the whole group. Libra Rio is the key EBITDA generator of the Libra Group and used to be the main dividend distributor for its parent, Libra Holding S.A. (Libra Holding).

Libra Rio's ratings were downgraded due to the severe deterioration in its operating cash flow and weakening of its credit metrics. The strong economic slowdown coupled with important macroeconomic variable, such as foreign exchange depreciation, increasing competition and the higher cost reduction of the vessel owners, led to significant decline of consolidated volumes and profitability f Libra Holding, with material negative impact in its net leverage ratios. Consolidated adjusted debt/EBITDAR should reach 5.0x by the end of 2015, compared with Fitch's initial expectation of 3.5x for the period, and average 2.4x from 2011 to 2014.

The Negative Outlook reflects Fitch's expectation that 2016 will be hard to Libra's businesses, compared to the previous year, with continued reduction in its consolidated operating cash flow. The Negative Outlook also reflects how the group has compulsory capex to be completed from 2017 onwards, thus, operating cash generation needs to recover. Fitch also considered that measures to adjust costs and enhance liquidity have begun and will be concluded over the next six months, in order to avoid continued deterioration of consolidated leverage and, mainly, to preserve the current adequate short-term debt coverage ratios. If these measures do not occur, additional downgrades may result.

The ratings continue to be supported by the group's solid business profile, based on port terminal operations in Rio de Janeiro and in Santos. Historically, this industry in Brazil has demonstrated positive long-term fundaments, based on moderately high profitability and relatively predictable demand. The short-term challenges are related to the weak industrial activity, significantly pressured by the macroeconomic environment within the country. Fitch believes that Brazilian port activity tends to rapidly benefit from eventual economic recovery.

KEY RATING DRIVERS

High Leverage Should Remain up to 2017

Libra Holding's consolidated leverage is high for the rating category. Positively, the group has a long track record of conservative capital structure. However, the severe contraction of consolidated EBITDAR and the lack of expectation for recovery during 2016 will prevent Libra Holding from deleveraging its balance sheet up to 2017. As of Sept. 30, 2015, the consolidated adjusted net debt/EBITDAR, according to the agency's methodology, was 4.6x. Fitch expects this ratio to reach 5.0x by 2015 and 2016, and a slight decline by 2017. A material decline will come in the following years, when demand is expected to start recovering and the group will be able to capture volume increases.

As of Sept. 30, 2015, Libra Holding's total adjusted debt was BRL1.9 billion, including around BRL332 million of port authority obligations, according to Fitch's calculation. About 40% of consolidated debt is dollar-denominated, including Resolucao 4131 (trade finance debt), which is compulsorily hedged. The group is engaged in derivative instruments to hedge 55% of its foreign currency debt and benefits from dollar-denominated revenues that represents 25% of the foreign currency debt. These two factors provide the groups reasonable protection of cash flow against FX exposure. The refinancing challenge is concentrated in 2017, when the group has BRL500 million of debt to be amortized. Libra group has presented adequate access to credit lines, even during the current more restricted credit environment in Brazil.

Challenges of Operational Cash Flow Generation

Libra Holding's operating cash flow has significantly weakened over the last two years. The company has exhibited solid consolidated operational cash flow up to 2013, based on a relatively stable volumes of cargo handled and stored combined with increasing port tariffs. During 2014 and 2015, the sluggish economic environment combined with increasing competition in Santos Port threated Libra group's operation, putting pressure on its revenues and operating margins. The devaluation of the BRL materially affected the handling and storage of import goods, which present operating margins significantly higher than the services related to export flow.

As of Sept. 30, 2015, consolidated EBITDAR significantly contracted to BRL337 million, negatively compared to BRL426 million in 2013. Fitch forecasts that Libra Holding will post consolidated EBITDAR below BRL300 million by December 2015, as a result of a 10% - 15% contraction in handling and stored volumes in both terminals(Rio de Janeiro and Santos).

The company does not release interim cash flow statements. During the last five years, Libra Holding has posted strong consolidated CFFO. The negative FCF during this period resulted from expressive dividend distribution. Fitch does not expect Libra Holding to distribute dividends during 2016 and 2017. Fitch expects negative FCF of about BRL50 million in 2016; however, it should decline in the following years due to the significant capex plan.

Fitch foresees a more challenging scenario for container port activity in Brazil during 2016, following industrial slowdown. This is likely to result in a severe decline in prices and volumes for port activity. These factors are expected to pull 2015 net revenues, EBITDAR and margins to the lowest levels since 2011. Consolidated EBITDAR margins have been relatively high, around 38% over the last five years and are expected to slightly decline to around 32% as a result of the loss of scale.

Capex Plan Expected to Pressure Cash Flow

From 2017, the group has a significant compulsory investment program of BRL800 million up to 2027. This obligation is linked mainly to renewal of terminal concessions in Santos, in September 2015. The capex plan foresees BRL 150 million of investment in 2017, with increases in the coming years. Among others, the group must incur BRL450 million of investment in Santos terminals by 2019, related mainly to increase capacity. These obligations will put pressure on the consolidated FCF. These investments should be financed by a combination of long-term debt, operating cash flow and funds from grant power.

Business Risk Will be Strongly Tested

Libra Rio operates in a low-risk industry in Brazil. Although the industry's operational variables, such as volumes and tariffs, has deteriorated and is not expected to resume during 2016, the port sector benefits from solid long-term business fundamentals, such as moderately high operating margins and predictable demand. The lack of logistics infrastructure in Brazil, mainly port terminals, combined with an increase in international trading over the last decade, supports the medium to long-term operational trends of the country's current ports. On the other hand the negative outlook for the Brazilian economic scenario may threaten the industry in the short term, since sluggish industrial activity puts pressure on port volumes and prices.

Adequate Business Profile

Libra Rio is a mature operation in Rio de Janeiro Port. It has held a solid concession contract since 1998, which was renewed in 2011, and expires in 2048. It provides clear visibility of the company's future cash flow. This terminal is the third largest operator in the Rio de Janeiro Port, with 25% of market share.

The group's activity is Santos Port started in 1995 and its concession contract was renewed up to 2035. The market share at Santos Port is about 13% and represents 32% and 15% of consolidated net revenues and EBITDA, respectively. Libra Santos and Codesp (the regulator) agreed to enter into an arbitrage process, related to concession contingencies. The uncertainty over the outcome of the arbitrage process, related to the amount and payment schedule, supports Fitch's decision not to consider this assumption in its base case. Any decision will be considered an event which could affect the ratings by several notches.

The Libra group's consolidated operations are more concentrated in the port sector compared to other Fitch rated peers in the infrastructure sector. In 2015, about 66% and 87% of Libra group's consolidated net revenues and EBITDA, respectively, was generated by port activity, and the second-largest business (logistics) is also closely related to port business. Libra Rio represented 34% and 73% of the consolidated net revenues and EBITDA, while Libra Santos represented 32% and 15%, respectively.

Libra group's port business has an important track record of successfully operating in Brazil for almost 20 years. While Libra Rio has not faced aggressive competition over the last several years, its sister company, Libra Santos, has faced some operating challenges due to the entrance of new players in the market during 2013, which has enhanced competition. The main challenge Libra Rio now faces is recovering over the next two years the cargo it lost during 2015, due to market pressures and works related to the dredging of the port access channel and its draft, in charge of the the grant power (Brazilian Secretary of Ports).

KEY ASSUMPTIONS

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

--Decline in volumes of Libra Santos and Libra Rio of 3.5% and 20%, respectively, in 2016;
--EBITDA margin contraction to 32% in 2016;
--Capex of BRL50 million in a consolidated basis in 2016; and BRL400 million from 2017 to 2019.

RATING SENSITIVITIES

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

--Consolidated net adjusted debt-to-EBITDAR ratio consistently above 4.5x, in 2017, and above 3.5x in 2018, in sustainable basis;
--Cash/short-term debt below 2.0x; and
--EBITDAR margins below 28.0% on a consistent basis.

An upgrade is unlikely in the medium term due to the challenges of the company to the next two years. The Outlook may be revised to Stable from Negative, supported by the reduction of the current high leverage ratios above Fitch' expectation, along with the Libra group keeping its business profile and maintaining adequate short term debt coverage ratios.

LIQUIDITY

Historically, Libra Holding has maintained satisfactory consolidated liquidity, although this metric has weakened during the last years. The average coverage ratio of short-term debt by cash and short-term debt by cash+CFFO, from 2011 to 2014, have been strong, at 2.1x and 3.2x, respectively. As of Sept. 30, 2015 LTM, cash/short-term debt was 1.1x. On this date, cash was BRL386 million. Fitch expects the group to strengthen its liquidity in the short term which should support the current rating.
The challenge will come during 2017 when the company has BRL150 million of mandatory capex to be financed and BRL500 million of debt maturity to meet. This will make the company strongly dependent on significant increasing operating cash flow generation and additional debt issuance in order to roll over short-term debt and finance capex.