Fitch Ratings has affirmed Cosan S.A.'s (Cosan) Long-Term Foreign Currency (FC) Issuer Default Rating (IDR) at 'BB', Local Currency (LC) IDR at 'BB+' and National Long-Term rating at 'AAA(bra)'.
The Rating Outlook is Negative for the FC IDR and Stable for the LC IDR and National Scale Rating. Fitch has also affirmed the ratings on all related cross border debts at 'BB', as they are unconditionally and irrevocably guaranteed by Cosan.
In addition, Fitch has affirmed at 'BB' the ratings of the senior unsecured notes due 2029 originally issued by Cosan Limited (Cosan Limited, Long-Term LC IDR BB/Stable and Long-Term FC IDR BB/Negative) that moved into Cosan. Fitch has also upgraded to 'AAA(bra)' from 'AA+(bra)' the National Scale Rating of the unsecured debenture issuance of BRL1.7 billion, originally issued by Cosan Logistica S.A (Cosan Log, AA+(bra)'/Stable) that also moved into Cosan. At the same time Fitch has withdrawn the corporate ratings of Cosan Limited and Cosan Log.
The rating actions follow the conclusion of the corporate restructuring in which Cosan Limited and Cosan Log merged into Cosan. While it expects Cosan's net debt to increase by BRL4.4 billion as the company incorporates the debts originally issued by Cosan Limited and Cosan Log, Fitch estimates Cosan's credit metrics to remain strong supported by higher inflow of dividends expected for 2021. Fitch projects Cosan's net debt to EBITDA plus dividends ratio increase to 3.5x in 2021 and decline to 1.6x by 2023 as compared to 0.7x and 0.1x, respectively, forecasted by Fitch before the restructuring.
The ratings incorporate the expectation that Raizen Energia S.A and Raizen Combustiveis S.A (jointly referred here as Raizen) will resume the payment of meaningful dividends in 2021 and that Comgas will continue to upstreaming meaningful dividends to the company over the next couple of years.
Fitch sees Cosan's direct stake at Rumo S.A (Rumo; BB/Negative, BB+/Stable, AAA(bra)/Stable), Brazil's largest railroad operator, that follows the restructuring as positive to its business profile as it improves assets diversification and reduces group's cash flow volatility derived from the S&E business. Cosan's robust portfolio of assets will allow the company to maintain strong liquidity profile and interest coverage ratios above 3.8x over the next two years combined with extended debt maturity schedule. The company's liquidity also benefits from an undrawn committed standby facility of BRL250 million that Fitch expects to increase to BRL750 million in the short-term..
Cosan's LC IDR is constrained by the structural subordination of its debt to dividends received from Raizen Combustiveis S.A. (FC and LC IDRs BBB/RWN and Long-Term National Scale Rating AAA(bra)/Stable), Raizen Energia S.A. (LC and FC IDRs BBB/RWN and Long-Term National Scale Rating AAA(bra)/Stable) and Companhia de Gas de Sao Paulo (Comgas; FC IDR BB and LC IDR BBB-/Negative, National Scale Rating AAA(bra)/Stable). The Negative Outlook for Cosan's FC IDR reflects Brazil's BB-/Negative.
Fitch has withdrawn the ratings of Cosan Limited (Long-Term LC IDR BB/Stable and Long-Term FC IDR BB/Negative) and Cosan Log (AA+(bra)/Stable) following their mergers into Cosan.
KEY RATING DRIVERS
Robust Asset Portfolio: Cosan's four main assets and sources of dividends are companies with robust credit quality. While Fitch does not expect Rumo to distribute dividends before 2023, it believes Cosan's business model will improve following the company's now direct stake into Rumo, Brazil's largest railroad operator. Rumo's ratings are supported by its solid business position as one of the largest railroad operators in Brazil. The company has competitive advantages over other transportation options, with relatively high and stable operating profitability and robust cash flow generation. The industry fundamentals are strong and benefit from stable demand throughout the cycles, and the rating incorporates Rumo's conservative capital structure, as well as its sound liquidity position, with low debt concentration during the strong capex period. The presence of Rumo contributes to broader Cosan's business diversification and helps the group to further lessen the cash flow volatility derived from the S&E business.
While Raizen's ratings have been placed on Rating Watch Negative following the acquisition of Biosev, Fitch does not expect the acquisition, if concluded, to affect Raizen's capacity to pay significant amounts of dividends to Cosan as from fiscal 2022. Biosev is currently Brazil's third largest S&E player in the country, running 32 million tons of crushing capacity spread over 9 mills. Following the acquisition, Raizen will have total sugar cane crushing capacity of 105 million tons per year in Brazil, the equivalent of 15% of total installed capacity in Brazil's Center South. Raizen Combustiveis is second largest fuel distributor in Brazil with a 20% market share in terms of volumes. Raizen's investment grade ratings are based on the combined financial strength of the two operational companies and their mutual financial support and cross guarantees provided. Raizen is a joint venture (JV) and represents an important investment for both its shareholders, Cosan and Shell (AA-/Stable).
Comgas is Brazil's largest natural gas distribution company in terms of volume billed that operates in a sector with low to moderate business risk and high growth potential. Comgas's ratings are sustained by the solid fundamentals of its natural gas distribution business and historically robust financial profile with reduced leverage, strong liquidity profile and significant cash flow from operations (CFFO). Comgas's business profile benefits from its operations in the state of Sao Paulo, the most economically significant state in Brazil, and from the company's long-term concession agreement, which includes clauses with non-manageable cost pass-through that protect its cash flow generation. The company has favorable growth prospects in the medium and long term given the expectation of gas-distribution network and customer base. Fitch believes the creation of Compass strengthens Cosan's portfolio of assets by increasing Cosan's presence in the Brazilian gas and energy markets, for which Fitch believes there is high growth potential.
Temporary Leverage Increase: Fitch expects Cosan's net debt to increase by BRL4.4 billion following the mergers of Cosan Limited and Cosan Logistica and reach BRL6.8 billion by the end of 2021. Fitch projects Cosan's net debt to EBITDA plus dividends received ratio to increase to 3.5x in 2021 and to decline to 2.5x in 2022 and 1.6x in 2023, as the inflow of dividends increases to BRL2.1 billion and BRL2.5 billion in 2021 and 2022, respectively. As of Dec. 31 2020, Cosan's net debt/EBITDA plus dividends received ratio was 2.8x.
As of Dec. 31, 2020, Cosan's debt at the holding level of BRL4.2 billion consisted of intercompany loans of BRL6.3 billion, which represent bond issuances by Cosan's fully owned subsidiaries, and non-voting preferred shares of BRL387 million due 2022. Although issued by Cosan Luxembourg S.A. and Cosan Overseas Ltd, the associated debt at both entities is guaranteed by Cosan, which is ultimately responsible for the payment. Fitch also incorporates net FX derivative balances of BRL2.5 billion into Cosan's debt. Cosan Limited's and Cosan Log's debt amounted to BRL 4.2 billion, net of derivatives, and BRL1.7 billion, respectively, as of Dec. 31 2020.
Comfortable Interest Coverage: Fitch expects interest coverage to recover in 2021, as Raizen resumes dividends payments. Fitch's base case scenario incorporates dividends of BRL2.1 billion in 2021 being BRL1.2 billion from Raizen and BRL900 million from Comgas. Fitch forecasts Cosan's EBITDA plus dividends/gross interest ratio comfortable at 4.1x in 2021, from less than 2x in 2020. Fitch estimates that the strong interest coverage from 2021 onwards will allow the company to gradually reduce its gross debt by about BRL1.3 billion by the end of 2023. Fitch's base case projections also consider the expectation that investments at Compass Gas e Energia (Compass) will not pressure Cosan's liquidity or impair its ability to receive meaningful amounts of dividends from Comgas over the next two years.
Cosan's access to its main investees is limited to dividends, as the control of Raizen Combustiveis and Raizen Energia are jointly controlled by Cosan and Shell. Comgas is a regulated concession, and any intercompany loan to shareholders must be approved by regulators. Cosan has a long track record of robust cash inflow from dividends from its investees, and in 2019 the company also benefited from a BRL1.5 billion capital reduction in Comgas.
DERIVATION SUMMARY
Cosan's ratings are supported by its strong and diversified asset portfolio of investment grade companies, with activities in distribution of natural gas, S&E, and the sale of fuels and lubricants. It also benefits from the stable operating performance and growth prospects of rail road operations represented by Rumo. Cosan's ratings benefit from the robust credit quality of its subsidiaries and their ability to pay robust dividend over the next few years.
Cosans ratings compare unfavorably with Votorantim S.A's. (VSA, LT FC/LC IDR BBB-/Negative and National Scale Rating AAA(bra)/Stable), one of Latin America's largest industrial conglomerates. VSA has a diversified business portfolio, strong market position in the industries it participates in, and geographic diversification with strong operations in the Americas, while Cosan Limited's assets are primarily located in Brazil and with a representative share of its cash flow generation capacity in the more volatile S&E business.
VSA has stronger liquidity than Cosan, but Cosan Limited is better positioned in terms of cash flow generation compared to both VSA and Grupo KUO, S.A.B. de C.V.'s (KUO, LT FC/LC IDR BB/Negative), a Mexican Group with diversified business portfolio in the consumer, automotive and chemical industries.
KEY ASSUMPTIONS
Dividends from Raizen and Comgas of BRL1.2 billion and BRL900 million, respectively, in 2021. For the next years, average dividends from investees of about BRL2.6 billion per year. No dividends from Rumo before 2023.
The merger with Cosan Limited and Cosan increases Cosan's net debt by BRL4.4 billion .
Annual dividends paid to Cosan's shareholders of BRL500 million over the next years.
New issuances at the holding level will only be used to refinance existing debt.
Absence of major new acquisitions and significant capital injections in subsidiaries.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upgrade is unlikely and will be linked to an improvement in the credit profile of Raizen Combustiveis, Raizen Energia Comgas and/or Rumo
The revision of the Outlook on Brazil's sovereign rating to Stable from Negative would trigger a revision of the Outlook for Cosan's FC IDR
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Deterioration of the credit profiles of Raizen Combustiveis, Raizen Energia, Comgas and/or Rumo, and Cosan's interest coverage by dividends received falling below 2.0x on a sustainable basis.
A downgrade of the sovereign rating may also trigger a downgrade of Cosan's Foreign Currency IDR and ratings for the associated bond issuances
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: In Fitch's opinion, Cosan will maintain robust liquidity position over the next two years, benefiting from the expected robust dividend flow, in addition to a well-laddered debt maturity schedule. Fitch projects Cosan to report a cash position of BRL2.6 billion as of Dec. 31, 2021 and short-term debt relating only to accrued interest payments on bond issuances currently outstanding. As of Dec. 31, 2020, the holding company reported cash and marketable securities of BRL1.9 billion and short-term debt of BRL137 million and Fitch expects Cosan Limited to contribute with cash of BRL550 million following the merger.
There are no debt maturities scheduled for 2021, and Fitch estimates payments of BRL387 million of preferred shares in 2022. For 2023 Fitch estimates payments of BRL300 million net of derivatives, under the 2023 bond notes, and BRL580 million relating to the first installment of the unsecured debentures issued by Cosan Log in 2020. Around 70% of its debt is due in five years and beyond, and Cosan's liquidity is reinforced by an undrawn standby credit facility of BRL250 million that Fitch expects to increase to BRL750 million in the short term. The group's strong financial flexibility relative to its access to the debt and capital markets, in combination with dividends received from its investees ensures adequate refinancing capacity for Cosan. Fitch expects dividends received to provide Cosan with adequate repayment capacity for upcoming interest payments while it increases its cash position and supports its expected dividend payouts of BRL500 million per year.
SUMMARY OF FINANCIAL ADJUSTMENTS
Net derivative balances have been added to Cosan's adjusted debt figures.
Cosan's debt also includes the balance of BRL387 million in preferred shares, with final maturity in 2022.
EBITDA figures incorporate all cash dividends received from Cosan's investees.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.RATING ACTIONSENTITY/DEBT RATING PRIOR Cosan Luxembourg S.A.
senior unsecured
LT BB Affirmed BB
Cosan Limited LT IDR WD Withdrawn BB
LC LT IDR WD Withdrawn BB
senior unsecured
LT BB Affirmed BB
Cosan Overseas Limited
senior unsecured
LT BB Affirmed BB
Cosan S.A. LT IDR BB Affirmed BB
LC LT IDR BB+ Affirmed BB+
Natl LT AAA(bra) Affirmed AAA(bra)
Cosan Logistica S.A. Natl LT WD(bra) Withdrawn AA+(bra)
senior unsecured
Natl LT AAA(bra) Upgrade AA+(bra)
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
COSAN S.A. 
