Fitch Ratings has downgraded the Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) of InterCement Participacoes S.A. (InterCement) and its wholly owned subsidiary InterCement Brasil S.A. to 'CC' from 'CCC.'

Fitch has also downgraded InterCement Financial Operations BV's 2024 notes to 'CC'/'RR4' from 'CCC'/'RR4' and InterCement's national scale rating to 'CC(bra)' from 'CCC(bra)'.

The downgrade reflects Fitch's view that Intercement is likely to enter in a debt restructuring process soon, while it completes additional asset sales. Within this period, the company's strategy to preserve cash could also accelerate a default-like process.

Fitch expects the restructuring process will fall within its definition of a default-like process, which would result in a downgrade to 'C'. InterCement's credit risks has been pressured by persistently high refinancing risks and limited refinancing alternatives despite improving operating cash flow generation and asset divestures. Excluding its operations in Argentina (IDR C), the cash flow from which cannot be fully accessed, InterCement has an unsustainable capital structure.

Key Rating Drivers

Short-Term Debt Pressure: Fitch considers that a strategy to preserve cash is likely in the event of a potential debt restructuring process. Intercement's cash on hand as of March 31, 2023 was USD183 million and its most immediate debt maturities during 2023 totaled USD189 million. As of March 31, 2023, InterCement's total consolidated debt was USD1.7 billion, primarily consisting of USD548 million of 2024 unsecured bonds and USD881 million of local debentures due 2027. The Loma Negra shares are collateral for the debentures, which have the option to move up their maturity date to May 2024 (before the bonds) if the bonds are not refinanced.

Challenge to Complete Refinancing: InterCement is working with creditors to extend borrowings that are due within the next nine months while continuing to discuss asset sales, mainly for its African subsidiaries, and assessing opportunities to execute refinancing of its outstanding 2024 bonds and local debentures. In a scenario of potential asset sale, Fitch estimates resources to be in the USD200 million-USD250 million range, which would represent less than 15% of total debt.

High Leverage Excluding Argentina: InterCement faces currency control restrictions at its operations in Argentina, which increases its dependence on the Brazilian operation's cash flow generation to serve its financial obligations. Loma Negra C.I.A.S.A., InterCement's 51% owned Argentine subsidiary, generates around 50% of InterCement's consolidated adjusted EBITDA but holds only 9% of the net debt.

Excluding Loma Negra, InterCement's net debt to adjusted EBITDA would be approximately 6.1x, per Fitch's calculations, for the last 12-month period ended March 31, 2023. On a proportional basis, excluding the 48% of Loma Negra that InterCement does not own, leverage was 4.3x for the same period. That represents an improvement over the 2019/2020 period, with an average of 7.5x in 2019 and 5.8x in 2020, respectively. On consolidated basis, InterCement's leverage was 3.2x for the last 12-months ended March 31, 2023, 2.8x in 2021 and an average of 5x during 2019-2020. Fitch forecasts InterCement's adjusted net debt/EBITDA ratio, on a consolidated basis, will move toward 3.0x-3.5x by YE 2023 and to around 5.8x when excluding Argentina's operations.

Weak Economic Growth to Limit CFFO Expansion: The scenario of weak economic growth, high inflation and interest rates places additional pressure on InterCement's ability to boost its operating cash flow from operations (CFFO) in Brazil. Consumption in Brazil's cement market declined 3% during 2022 and forecasts indicate flat performance for 2023. Despite the lower profitability, the company has improved its conversion of EBITDA to cash, mostly due to working capital relief. In Brazil, InterCement's utilization rate was around 74% in 2022. The company has around 12.3 million tons in total active capacity and 5 million tons of hibernated capacity.

Consolidated Approach: As per Fitch's Parent and Subsidiary Linkage Rating Criteria, Fitch equalizes the ratings for Intercement and Intercement Brasil. This mainly reflects effective control and ample access to strategic and financial decisions, cross guarantees, asset collaterals (Loma Negra's shares as collateral of Intercement Brasil's local debentures) and financial covenants. The operations in Brazil represent 33% of InterCement's EBITDA and 29% of its debt.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Proactive steps by the company to materially bolster its capital structure, including asset sale, allowing a smooth refinancing of its capital market debt without material reduction in terms.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade may occur if, in Fitch's judgment, a default or default-like process has begun, which would be represented by a 'C' rating.

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

Limited Financial Flexibility: InterCement has high refinancing risks and its ability to continue to secure funding in the short term is uncertain. With the increasing interest rates in Brazil, its operating cash flow will be tight during 2023. As of March 31, 2023, InterCement had USD189 million in cash and USD1.7 billion in total debt. Debt schedule amortizations were USD183 million in 2023, USD906 million in 2024 (including USD548 million of senior notes), USD253 million in 2025, USD238 million in 2026 and USD122 million in 2027.

Issuer Profile

InterCement is a large cement producer with 20 million tons of total consolidated cement sales and annual production capacity of 35 million tons. The company has a diversified portfolio of assets with operations in Brazil, Argentina, Mozambique and South Africa.

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

InterCement has an ESG Relevance Score of '4' for Governance Structure due to limited board independence through ownership by key shareholder Mover Participacoes S.A. 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.

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