Fitch Ratings has downgraded
The Outlook for the FC and LC IDRs and National Scale is Stable.
The downgrade reflects Hidrovias' higher than expected leverage in the medium term. Even incorporating recent operating cash flow improvements, Fitch forecasts net leverage of 4.7x and 4.2x during 2022 and 2023, respectively. Ongoing hydrological risks, lower financial flexibility, and the fact that the company could have to renegotiate an important (in terms of EBITDA contribution) take-or-pay contract that historically had a strong credit quality off-taker (
Key Rating Drivers
Cash Flow Volatilities Despite Take or Pay Contracts: Hidrovias' business resilience was tested during 2021 when the company experienced a combination of drastic non-manageable events. The hydrological risk, which is now relatively higher than years ago, even considering positive developments during 2022 that indicate water levels in South Corridor to be better than the previous year. The crop failure in 2021 has also affected exports volumes in the North Corridor, reducing Hidrovias opportunities to leverage its assets and improve operating cash flow. For 2022, the scenario is more favorable with expectation of soy crop recovery in
High Leverage to Remain: The acquisition of Imperial during 2Q21 (
Managing Capex is Key: Management's strategy on business diversification, growth (discretionary capex), and returns to shareholders is a key to determining leverage trends. Fitch incorporates that in the medium-term, Hidrovias will continue to invest to leverage its business scale, taking advantage of growth opportunities in the market it operates. Fitch estimates around
Challenge to Increase Client Diversification: Hidrovias has portfolio concentration risk, as its main clients are
Grains and fertilizer, iron ore, and bauxite represent around 45%, 38%, and 16%, respectively, of Hidrovias' 2021 EBITDA. Approximately 58% and 42% of EBITDA is generated in
Derivation Summary
Hidrovias's business profile is well-positioned in the 'BB' rating category relative to transportation and logistics peers across the region, which are generally rated in the 'BB' to 'BBB' categories. Hidrovias' rating constraint derives from its medium-size business scale and weakest capital structure among Brazilian peers, including
Hidrovias' expected 2022 net leverage is higher than that expected for other rated Brazilian peers in the transportation and logistics sector with more mature operations and with higher credit ratings. Rumo, VLI and
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer:
Strong Revenue growth in 2022, reflecting recovery in both South and North Corridor, reaching around
EBITDA margin around 46%-48% in the next three years;
Total capex of around
No dividend distributions until net leverage moves down to 3.5x.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Broader client diversification;
Net debt/EBITDA consistently below 3.5x and total debt/EBITDA below 4.0x;
Interest coverage consistently above 4.5x;
Maintenance of strong liquidity to avoid refinancing risks.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Large debt-funded M&A transactions or entering into a new business in the logistics sector that adversely affect its capital structure on a sustained basis or increase business risk exposure;
Net leverage consistently above 4.5x on a sustained basis;
Deterioration of liquidity position, with increasing short- to medium-term refinancing risks.
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 '
Liquidity and Debt Structure
Adequate Liquidity Position: The challenging scenario during 2021 and the acquisition of Imperial has affected Hidrovias' historical robust cash position and its strong financial flexibility. As of
Hidrovias's cash position as of 1Q22 was adequate at
Issuer Profile
Hidrovias is an integrated logistics provider focused on waterways logistics services. It has an end-to-end infrastructure, including transhipment, port terminals and a fleet of barges, pusher tugs and cabotage vessels. The company operates in logistics corridors in the northern region of
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.
ESG Considerations
Fitch has revised the ESG Relevance score for Exposure to Environmental Impacts to '4' from '3', considering the effective impact on the company operations in 2021 due the hydrologtical risks. Due to lower draft in rivers, the company stopped navigating for around 2 months in South Corridor (iron ore take or pay contract). This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG Credit Relevance is a Score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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