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.
Cosan's ratings are supported by the company's strong and diversified asset portfolio of investment grade companies. The ratings incorporate the expectation that Cosan's credit metrics should not be materially affected by lower inflow of dividends in 2020 and that dividends should return to historical levels in 2021. Fitch's base case scenario assumes no dividends from Raizen in 2020, due to its efforts to preserve cash flow generation amid the economic impact caused by the outbreak of coronavirus pandemic in its main two businesses, while Comgas is expected to distribute about BRL976 million during the year.
Fitch expects Cosan's portfolio of assets to continue providing a robust flow of dividends, which would cover its negative EBITDA and interest expenses by over 6.0x over the next three years and pay enough dividends to support the cash flow needs of its main shareholder (Cosan Limited, Long-Term LC IDR/Stable and Long-Term FC IDR BB/Negative). Fitch believes the creation of Compass Gas e Energia (Compass) in 2020 strengthens Cosan's portfolio of assets by increasing the group's presence in the high-growth-potential Brazilian gas and energy markets.
While all the businesses in which Cosan invests were affected by the coronavirus outbreak, Fitch does not expect material impact on the credit metrics of its investees, and Raizen and Comgas' ratings were affirmed in May 2020. Raizen's strong business model will allow it to preserve a conservative credit profile, partially offsetting the impact of the outbreak of the coronavirus pandemic on commodity prices and fuel demand in Brazil and in Argentina. Although Fitch projects a material reduction in operating cash flow generation in fiscal 2021, Raizen's credit metrics will not be materially affected, with sound liquidity, low refinancing risk and net leverage at 2.0x on average, which provides sufficient headroom under its rating category. Fitch does not expect cash burn from operations for Comgas during 2020. The company's sound financial structure and liquidity profile provide enough buffer to support the expected challenging operating scenario.
The affirmation of the ratings also incorporate the expectation of a temporary increase in Cosan's net debt to EBITDA plus dividends ratio during 2020, reducing to below 1x in 2021, as Raizen resumes dividends payments. Fitch estimates that Cosan will maintain a strong liquidity profile and interest coverage ratios above 6x over the next two years, in addition to an extended debt maturity schedule. The company's liquidity also benefits from an undrawn committed standby facility of BRL501 million. The ratings also consider the expectation that investments at 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 LC IDR is constrained by the structural subordination of its debt to dividends received from Raizen Combustiveis S.A. (FC and LC IDRs BBB/Negative and Long-Term National Scale Rating AAA(bra)/Stable), Raizen Energia S.A. (LC and FC IDRs BBB/Negative 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.
KEY RATING DRIVERS
Robust Asset Portfolio: Cosan's three main assets and sources of dividends are companies with robust credit quality. In the S&E industry, Raizen Energia is the leading global producer, with an 11% share in Brazil's sugar cane crushed volumes, and the country's largest generator of energy from sugar cane bagasse. Raizen Combustiveis is second largest fuel distributor in Brazil with a 20% market share in terms of volumes in 2019, and the acquisition of Shell's assets in Argentina has increased geographic diversification. The joint-venture with FEMSA will also contribute to increased business diversification and capture additional value along the chain through the expansion of the convenience franchise store business. Fitch expects the fuel distribution business to account for more than 50% of Raizen's combined EBITDA in the medium term, which will be important to reduce the Raizen's exposure to the more volatile S&E business. Raizen's investment grade ratings are based on the combined financial strength of its two operating companies, as well as their mutual financial support and cross-guarantees. Raizen is a joint venture (JV) and represents an important investment for its two shareholders, Cosan and Royal Dutch Shell plc (Shell, IDRs 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.
Interest Coverage To Recover in 2021: Fitch expects a reduction in interest coverage during 2020 due to lower dividends and to recover in 2021, as Raizen resumes dividends payments. Fitch's base case scenario incorporates no dividends from Raizen in 2020 due to its efforts to preserve cash flow generation amid the economic impact caused by the outbreak of coronavirus pandemic in its main two businesses, while Comgas should distribute BRL976 million, and compares unfavorably with BRL3.4 billion received by Cosan in 2019. For 2021, Fitch projects dividends of BRL2.3 billion, of which BRL900 million from Comgas and BRL1.4 billion from Raizen, improving EBITDA plus dividends/gross interest ratio to a comfortable level of over 6.5x, from 2.1x projected for 2020. Higher interest coverage from 2021 onwards will allow the company to gradually reduce its gross debt by about BRL1.0 billion by 2023. Fitch's base case projections do not consider lower dividends to Cosan, as a result of the capital structure used to finance Compass's growth plan.
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.
Temporary Increase in Leverage: Fitch projects Cosan's net debt to EBITDA plus dividends received ratio to increase to 3.6x in 2020 and to quickly decline to 0.7x in 2021, as the inflow of dividends increase next year. Net debt was BRL4.3 billion and total dividend flow was BRL2.7 billion in the LTM ended March 31 2020, resulting in a net debt/EBITDA plus dividends received ratio to 1.0x. In the first quarter 2020, the company prepaid the BRL1.7 billion debentures issued to finance the acquisition of Comgas' shares.
As of March 31, 2020, total debt at the holding level of BRL4.3 billion consisted of intercompany loans of BRL6.2 billion, which represent bond issuances by Cosan's fully owned subsidiaries, and non-voting preferred shares of BRL620 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.
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. Cosan benefits from the robust credit quality of its investees and their ability to pay robust dividend over the next few years. The ratings incorporate the subordination of Cosan's debt to the obligations of its main investments, as the access to their cash is limited to dividends received.
Cosan's 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'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 is better positioned in terms of leverage and 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 Comgas of BRL976 million and no dividends from Raizen in 2020. For the next years, annual dividends from investees of about BRL2.4 billion, with Raizen resuming dividends payments in 2021.
Annual dividends paid to shareholders of BRL600 million for the next years.
BRL320 million of share repurchase in the first quarter 2020 and additional BRL280 million in 2021.
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 and/or Comgas.
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 and/or Comgas, 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 over BRL2 billion and short-term debt relating only to accrued interest payments on bond issuances outstanding as of 1Q20. As of March 31, 2020, the holding company reported cash and marketable securities of BRL2.0 billion and short-term debt of BRL63 million. The company does not have debt maturities in 2021, and Fitch estimates payments of BRL450 million of preferred shares and BRL350 million under the 2023 bond notes, net of derivatives, for 2022 and 2023, respectively. Around 75% of its debt is due in five years and beyond. Cosan's liquidity is reinforced by an undrawn standby credit facility of BRL501 million.
The absence of dividends payment by Raizen in 2020 should not materially impact Cosan's liquidity, and Fitch assumes that dividend payments from Raizen will be resumed in 2021, while Comgas should keep paying meaningful dividends in the period, estimated by Fitch at over BRL900 million per year. In 2020, the dividends from Comgas should provide adequate repayment capacity for upcoming interest payments and should allow Cosan to distribute dividends of about BRL600 million to shareholders. For 2021, Fitch expects Cosan to receive BRL2.3 billion in dividends which should comfortably cover the payment of interest and dividends. Fitch forecasts additional cash disbursement of BRL280 million from Cosan's share buyback program in 2021, on top of BRL320 million spent in 2020
SUMMARY OF FINANCIAL ADJUSTMENTS
Net derivative balances have been added to Cosan's adjusted debt figures.
Cosan's debt also includes the balance of BRL620 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 ACTIONS
ENTITY/DEBT RATING PRIOR
Cosan Luxembourg S.A.
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)
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
COSAN S.A. 
