OREANDA-NEWS. Fitch Ratings has downgraded the foreign currency Issuer Default Rating (IDR) and senior unsecured rating of Votorantim Cimentos (VCSA) to 'BBB-' from 'BBB'. The Rating Outlook remains Negative. A complete list of rating actions follows at the end of this press release.

The downgrade reflects the significant deterioration in the Brazilian economy resulting in weakening cement fundamentals over the medium term. The challenging domestic market coupled with VCSA's aggressive capital expenditure plans over the next 24 months will result in further deterioration of the company's credit profile. Partially mitigating these factors are VCSA's robust liquidity, diversified operations, and strong relationship with its parent, Votorantim S.A. (VSA).

The decision by Brazil's antitrust authority, CADE, to impose a BRL1.5 billion fine on VCSA and the forced sale of certain ready-mix assets for alleged cartel practices poses further uncertainty for the company over the coming years. VCSA, along with the other cement companies charged, have appealed the sanctions in the Brazilian courts. During 2015, VCSA was awarded an injunction suspending CADE's ruling until a final judgment is reached. Fitch expects the timing of the appeals process to likely take several years.

KEY RATING DRIVERS

Severe Contraction in Brazil's Cement Market to Persist

The Brazilian cement market declined approximately 10% to 64.9 million tons in 2015 from 71.7 million tons in 2014 due to a slowdown of infrastructure projects and bagged cement sales amidst the contraction in the country's economy. Further deterioration in cement volumes are expected due to increased unemployment, high real estate inventories, and limited construction projects during 2016 and 2017. Recovery of cement volumes will likely materialize by 2018, but growth in volumes will be sluggish as cement volumes are projected to remain below the level sold in 2014 for at least the next four years.

Weakening Operations Generation in Brazil

Fitch projects VCSA's EBITDA generation to be around BRL3.2 million for 2015 compared to BRL3.5 million for 2014 due to the deterioration in volumes sold, limited price increases, and increased costs during the year in Brazil. This will be partially offset by strong cash flow generation at the company's subsidiaries operating in North America, Europe, Africa and Asia. Offsetting the decline in VCSA's EBITDA generation in Brazil is the company's strong market share of 35% with its 27 plants and 33.3 million tons of installed capacity across the country and VCSA's international diversification, which mitigates some of the risks faced by small, regional players. Fitch envisions VCSA's capacity utilization rate in Brazil to fall to around 55% over the next two years compared to the 88% rate the company experienced in 2014.

Leverage to Remain High

VCSA's net debt to EBITDA ratio increased to 4.6x for LTM Sept. 30, 2015 compared to 3.4x in 2014. The increase in the company's net leverage is predominantly related to finalizing its large investments during a period of a significant decreased demand for cement in Brazil. The depreciation of the BRL during 2015 also contributed to the increase in VCSA's net leverage by approximately 0.6x. Fitch projects net leverage to remain above 4.5x in 2016 and above 4.0x in 2017 as the continued contraction in the Brazilian cement market is expected to be partially offset by continued strong growth in its international operations. VCSA has the ability to accelerate its deleveraging through the sale of non-core assets, restricting dividends to its parent, and other contingency plans which the company has in place.

Strong Liquidity

VCSA's liquidity is very strong and improved significantly during 2015. Fitch projects the company's cash position to be around BRL4.7 billion as of Dec. 31, 2015 compared to BRL2.5 billion for Dec. 31, 2014. In 2016 VCSA's cash balance was enhanced by a BRL1 Billion capital increase from VSA and the proceeds from the sale in 2015 of non-core assets. VCSA's amortization schedule is manageable, with an average debt maturity of nine years. Current cash on hand can cover more than 3.5 years of debt amortization. VCSA internally tries to maintain cash balances of approximately BRL3 billion a year. VCSA also renewed its revolving credit facilities of USD700 million and USD230 million, both maturing in 2020 during 2015.

International Operations Buoying the Group

VCSA's weakening Brazilian operations have been partially offset by stronger cash flow generation in its other key international markets. Fitch projects that the company's operations in North America have improved approximately to USD200 million in EBITDA during 2015 from USD129 million in 2014 which was largely due to increased volumes in key markets coupled with strong price increases. Fitch projects VCSA's North American operations to continue to produce strong results over the next two years as demand for cement in the great lakes region and Florida grow at a steady pace.

KEY ASSUMPTIONS

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

--Mid-High single digit consolidated volume decline in 2016 and low single digit consolidated volume increases in 2017 and 2018;
--Brazil volume decline of around 19% in 2016 with limited recovery until 2018;
--Solid mid-high single volume growth in other key markets such as North America, Europe, and Africa during 2016 and 2017;
--Consolidated EBITDA margin falling to between 20-22% during 2016 and 2017;
--Capital expenditures of BRL2.4 billion in 2016 and BRL1.5 billion declining thereafter following completion of expansion projects;
--Net leverage to remain above 4.5x in 2016;
--Maintaining strong liquidity position in 2016.

RATING SENSITIVITIES

Considerations that could lead to a negative rating action (rating or Outlook):

VCSA's foreign currency ratings could be downgraded further if the macroeconomic conditions in Brazil result in cement volumes declining more than Fitch's expectations of 19% in 2016, resulting in pressured credit metrics beyond a tolerable level. A return to through the cycle net leverage around 2.5x following the current economic contraction in Brazil and its investment cycle is expected from VCSA.

Considerations that could lead to a positive rating action (rating or Outlook):

A rating upgrade is unlikely in the near future for VCSA given the deteriorating conditions in the company's key market, investments in growth capex, and weaker credit metrics. A revision of the Outlook to Stable could occur if VCSA is successful in limiting its free cash flow burn and takes additional extraordinary measures to reduce its level of gross debt.

LIQUIDITY

VCSA's liquidity is very strong and improved significantly during 2015. Fitch projects the company's cash position to be around BRL4.7 billion as of Dec. 31, 2015 compared to BRL2.5 billion for Dec. 31, 2014. In 2016 VCSA's cash balance was enhanced by a BRL 1 billion capital increase from VSA and the proceeds from the sale in 2015 of non-core assets. VCSA's amortization schedule is manageable, with an average debt maturity of nine years. Current cash on hand can cover more than 3.5 years of debt amortization. VCSA internally tries to maintain cash balances of approximately BRL3 billion a year. VCSA also renewed its revolving credit facilities of USD700 million and USD230 million, both maturing in 2020 during 2015.

FULL LIST OF RATING ACTIONS

Fitch has downgraded VCSA's rating as follows:

--Foreign currency Issuer Default Rating to 'BBB-' from 'BBB';
--2021, 2022, and 2041 senior unsecured long-term notes to 'BBB-' from 'BBB'.

The Rating Outlook is Negative.