OREANDA-NEWS. Fitch Ratings has downgraded Votorantim S.A.'s (VSA) foreign currency and local currency Issuer Default Ratings (IDRs) to 'BBB-' from 'BBB'. In addition, Fitch affirmed the company's National scale rating at 'AAA(bra)'. The Rating Outlook is Negative for the foreign and local currency IDR's and Stable for the National Rating. A full list of rating actions follows at the end of this release.

Factored into the rating downgrade is the deterioration in Votorantim Cimentos S.A's (VCSA) operating cash flow and capital structure due to the rapid decline in domestic cement sales during 2015. VCSA is a key operating subsidiary of the Votorantim Group, generating approximately 57% of VSA's EBITDA in 3Q15. The challenging domestic market coupled with VCSA's aggressive capital expenditure plans over the next 24 months will result in further deterioration in the subsidiary's capital structure and ultimately pressure VSA's consolidated credit metrics during this period. VSA's ratings continue to factor in its strong liquidity position, diversified cash flow generation from its international operations in cement, metals and mining, steel, and key investments in pulp and orange juice.

KEY RATING DRIVERS

Deteriorating Credit Metrics

VSA's net leverage deteriorated during the past year with the company exhibiting a net debt to EBITDA ratio of 3.3x for the LTM Sept. 30, 2015 from 2.3x as of Dec. 31, 2014. This increase in consolidated leverage was primarily due to increased debt in the company's cement operations to BRL19 billion in Sept. 30, 2015 from BRL14.6 billion in 2014 coupled with the sale of surplus energy within its metals division which generated BRL700 million during 2014. Fitch projects VSA's net leverage to be around 2.8x as of Dec. 31, 2015 primarily due to extraordinary dividends received from Fibria. Excluding this dividend, net leverage remained relatively flat 3.2x. Fitch projects net leverage to remain elevated in 2016 at around 3.7x due to poor operating results in the company's cement business coupled with the deteriorating macroeconomic conditions in Brazil impacting its other domestic operations. The company's capital structure will likely be strained over the next 18-24 months. Votorantim has demonstrated commitments to reducing its leverage through extraordinary measures in the past.

Weakening Cashflow from Cement Business

VCSA is the largest of VSA's subsidiaries, and the Brazilian fundamentals for cement demand have deteriorated, increasing its leverage and pressuring cash flows. Fitch's base case assumptions indicate that VCSA will comprise around 50% of the Votorantim Group's EBITDA and 75% of its net debt during 2015. VCSA's net leverage remained high at 4.6x for the LTM Sept. 30, 2015 compared to 4.3x in 2014 due to the severe contraction in the domestic cement market with volumes falling approximately 9% coupled with the group's aggressive capex spending. VCSA will have an extremely difficult time reducing its net leverage to below 3.5x by 2018 as a result of Brazil's severe economic recession. Brazil's antitrust authority, CADE, decided to impose a BRL1.5 billion fine on VCSA and the forced sale of certain ready-mix assets for alleged cartel practices which pose further uncertainty for the group's credit profile over the coming years. VCSA, along with 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 judgmental is ordered. The appeals process timing will likely take several years.

Excellent Pulp Market Position

Votorantim owns 29% of Fibria Celulose S.A. (Fibria), which is the world's largest producer of market pulp, with 5.3 million tons of bleached eucalyptus kraft market pulp capacity. The largest shareholder is BNDES with 29.08% ownership. The shareholder agreement allows for VSA to manage Fibria's operations. Fibria is among the lowest cost producers of pulp globally. Fibria's sales volumes are more stable than most companies within the industry, as more than 50% are directed toward the tissue paper market. Fibria's 2015 EBITDA generation benefited from the depreciation of the Brazilian real against the U.S. dollar, and to lesser extent higher pulp prices. The company generated USD1.6 billion of EBITDA, USD1.4 billion of funds from operations (FFO) and USD734 million of FCF during 2015. Fitch expects Fibria to generate about USD1.4 billion of EBITDA and USD1 billion of FFO in 2016, due to slight reduction in hardwood pulp prices coupled with inflationary pressures, as nearly 85% of the company's costs are denominated in Brazilian reals.

Strong Growth Prospects in Mining

VSA owns 60% of Compania Minera Milpo S.A. (Milpo), which is a low-cost polymetals miner based in Peru, with zinc accounting for 45% of its 2015 revenues, followed by copper (32%), silver (16%), lead (9%) and gold (2%). Cash flow generation at Milpo has historically been robust due to its low second quartile position on the global zinc cost curve. Milpo's consolidated cash cost of production decreased to USD33.3 per mtonne (mt) of treated ore in 2015 from USD35.5 per tonne in 2014 due to considerable cost reduction initiatives. The lower cash cost helped to mitigate the effect of the challenging low pricing environment during the year. Milpo's revenues and EBITDA during 2015 declined to USD626 million and USD179 million, respectively, from USD758 million and USD266 million, respectively, during 2014. Fitch links Milpo's credit strength to that of its parent as it is listed as a 'Material Subsidiary' for the cross-default and acceleration provisions on Votorantim's debt. Milpo's net leverage ratio is expected to be around negative 0.7x in 2016.

Strong Liquidity

VSA's liquidity position remains robust. Fitch projects VSA to report around BRL30.6 billion of total debt and BRL10.6 billion of cash and marketable securities as of Dec. 31, 2015. The company also has access to a combined USD1.2 billion of revolving credit facilities expiring in 2020. The company faces amortizations of BRL2.6 billion during 2016 and BRL2 billion during 2017. Average gross debt maturity was 7.4 years as of Dec. 31, 2015 according to Fitch projections. Current cash on hand can cover more than three years of debt amortization. Fitch expects the company will take aggressive measures to manage its cash balance.

Lower Cash Flow Generation

VSA's cash flows were pressured by VCSA's financial deterioration during the year. Fitch projects VSA's cash flow from operations (CFO) declined to approximately BRL3.9 billion for 2015 from BRL4.4 billion in 2014. Capital expenditures remained high at BRL3.3 billion, as the company continues to invest in expansions, particularly within the cement division. VCSA plans to complete its investments within the northeast and Midwest regions of Brazil and in its North American and European operations. Fitch projects VSA's FCF to be negative in 2016 due to the continued investments and weakening economic conditions.

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

--High single digit consolidated cement volume decline in 2016 and low single digit consolidated volume increases in 2017 and 2018, Brazilian volume decline of around 18% in 2016 and limited recovery in 2018, and solid mid-high single volume growth in other key markets such as North America, Europe, and Africa during 2016 and 2017;

--Zinc prices of USD1,625/tonne in 2016, USD1,800/tonne in 2017 and USD1,900/tonne in 2018 and lead prices at USD1,750/tonne 2016-2018; aluminum prices of USD1,500/tonne in 2016, USD1,700/tonne in 2017 and USD1,700/tonne in 2018; operations at Nickel plants not resumed during projected periods.

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

VSA's ratings could be downgraded further if macroeconomic conditions in Brazil persist worse than Fitch's expectations and result in the company's credit profile deteriorating beyond Fitch's Base Case expectations. A key driver of a downgrade occurring is a further deterioration of the credit profile of VCSA. While VSA's net debt to EBITDA ratio is projected to increase to around 3.7x for 2016, Fitch expects VSA to deleverage to around 2.5x by 2018, absent any extraordinary measures taken by the company during the period.

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

A rating upgrade is unlikely in the near future given the significant economic headwinds facing VSA. The Outlook could be revised to Stable if VSA is successful in limiting its free cash flow burn and takes additional extraordinary measures to reduce its level of gross debt during 2016.

LIQUIDITY

VSA's liquidity position remains robust. Fitch projects VSA to report around BRL30.6 billion of total debt and BRL10.6 billion of cash and marketable securities as of Dec. 31, 2015. The company also has access to a combined USD1.2 billion of revolving credit facilities expiring in 2020. The company faces amortizations of BRL2.6 billion during 2016 and BRL2 billion during 2017. Average gross debt maturity was 7.4 years as of Dec. 31, 2015 according to Fitch projections. Current cash on hand can cover more than three years of debt amortization. Fitch expects the company will take aggressive measures to manage its cash balance.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating actions:

Votorantim S.A. (Votorantim)
--Foreign and local currency IDRs downgraded to 'BBB-' from 'BBB'; Outlook Negative;
--National scale rating affirmed at 'AAA(bra)'; Outlook Stable.

Votorantim S.A. is the new name of the previous entity Votorantim Participacoes S.A. following a simplification of the Votorantim Group's corporate structure.

Votorantim Industrial S.A. (VID)
--Foreign currency IDR downgraded to 'BBB-' from 'BBB' and withdrawn as the sub-holding company no longer exists due to a simplification of the Group's corporate structure.

Companhia Brasileira de Aluminio (CBA)
--2019, 2021, and 2024 guaranteed notes downgraded to 'BBB-' from 'BBB'.

Voto-Votorantim Overseas Trading Operations IV Limited
--2020 notes downgraded to 'BBB-' from 'BBB'.