RATING ACTION COMMENTARY
Fitch Assigns 'BB-' First Time Rating to Movida; Outlook Stable
Mon 25 Jan, 2021 - 15:10 ET
Fitch Ratings - Rio de Janeiro - 25 Jan 2021: Fitch Ratings has assigned �rst time Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'BB-' to Movida Participacoes S.A. (Movida) and to its proposed benchmark sized unsecured notes to be issued by Movida Europe, a wholly owned subsidiary of Movida. The notes will be unconditionally and irrevocably guaranteed by Movida Participacoes S.A. Proceeds will be used to re�nance existing debt and general corporate purposes. The corporate Rating Outlook is Stable. Fitch currently rates Movida's National Long-Term Rating 'AA-(bra)/Outlook Stable.
The rating re�ects Movida's solid business position within the competitive car and �eet rental industry in Brazil, with adequate operational ef�ciency. Its size, as the third largest industry player in Brazil, results in good bargaining power with automobile manufacturers, enabling Movida to better capture economies of scale. The rating also incorporates the company's improved business and operating performance in the last couple of years and solid �nancial performance during the coronavirus pandemic. A key factor in the ratings is the company's sizable pool of unencumbered vehicles that bolster its access to funding during periods of restricted availability of credit in debt capital markets.
Movida's market-share oriented strategy and its aggressive growth, leads to recurring negative FCF generation, which has been funded primarily through debt. The car and �eet rental industry is capital intensive, largely exposed to credit availability and interest rate levels and to the economic cycle, particularly to unemployment. Over thepast few years, favorable industry dynamics in the local market for �eet and car rental and the used car sales business have been supporting strong growth opportunities and mitigated the poor macroeconomic conditions in Brazil. The local industry faces �erce competition and is currently experiencing a period of consolidation after the announced merger of the two largest players during 2020.
Partially offsetting �nancial and sector risks, is Movida's ability to adjust its operations and growth to economic cycles at its discretion, as it has done in the past, in order to generate positive FCF and enhance its �scal �exibility. The company has demonstrated an improving access to lower cost credit lines, mostly in the domestic market, and with the current issuance it seeks to diversify its funding sources.
The Stable Outlook re�ects our expectation that Movida's revenues will grow while maintaining an adequate credit pro�le commensurate with its rating level. Fitch projects that the company's adjusted net debt/EBITDA ratio will remain between 3.5x and 3.8x across our rating horizon. For 2020 and 2021, respectively, Fitch forecasts net revenues of BRL4.2 billion and BRL5.3 billion, EBITDA of BRL818 million (19% margin) and BRL1.2 billion (21% margin), and net debt/EBITDA of 3.0x and 3.5x.
KEY RATING DRIVERS
Solid Competitive Position: As the third largest player in the car and �eet rental industry in Brazil, Movida has a solid business position, underpinned by its large scale, operating expertise, a national footprint and an adequate used car sale operation. As of September 2020, Movida's �eet of 108,709 vehicles, consisting of 67,978 in rent-a-car (RaC) and 40,731 in �eet management (FM), secured market shares of approximately 15% in RaC and 8% in FM, by �eet size. As a result, the company has good bargaining power with automobile manufacturers and is able to capture economies of scale. At YE 2020 and 2021, Movida's total �eet should be around 112,092 and 130,947 vehicles, respectively.
Capital Intensive Industry: The capital-intensive nature of the rental industry, which demands sizable and regular investments to grow and renew the �eet, pressures the �nancial pro�le of the companies in the sector. Therefore, lower funding costs and strong access to credit markets are key competitive advantages. On the other hand, the business model allows the companies to postpone �eet renewal and adjust, if needed. Main risks for this industry in 2021 are the uncertainty regarding the pace of the recovery of the Brazilian automobile industry, which may constrain vehicle supply in the �rst quarter, constrained credit markets, an unexpected increase in interest rates, worse than expected economic activity and deterioration in the used car sale market.
Improving Operating Performance: Fitch expects Movida to continue to improve operating performance in the following years, supported by a healthy price environment, stronger demand, new mobility trends and maintenance costs per operating vehicle, utilization rate, and selling cost per vehicle closer to market benchmarks. Fitch forecast the RaC utilization rate at 77% in 2020 and 78% in 2021 compared to 76% in 2019, while �eet utilization rate should be higher than 95%. Fitch expects to see the company's EBITDA margins evolving from pre-crises levels in 2021-2022, as car and �eet rental regained traction after the worst period of lockdown restrictions.
Fitch forecasts EBITDA of BRL818 million (19% margin) in 2020, with strong growth in 2021. Fitch estimates EBITDA at BRL1.2 billion (21% margin) and BRL1.7 billion (22% margin), in 2021 and 2022, respectively. We project negative FCF during the rating horizon, due to higher growth capex, around BRL365 million in 2020 and BRL1.5 billion in 2021. In the LTM ended on September 2020, Movida's EBITDA and FCF were, respectively, BRL705 million (17% margin) and negative BRL400 million.
Growth to Continue to Pressure Leverage: Movida's growth-oriented strategy, to enhance and consolidate its business position, may pressure the company's leverage levels over the rating horizon. Fitch expects Movida's commitment to a sound capital structure alongside its robust cash generation will enable the company to manage its growth while keeping leverage levels aligned with current ratings. Fitch forecast net debt/EBITDA around to 3.5x depending on the stage of the investment cycle, being 3.0x in 2020, 3.5x in 2021 and 3.8x in 2022.
Coronavirus Limited Impact: The coronavirus outbreak containment measures, such as social distancing and mobility restrictions had a lower impact in the industry than initially anticipated. During the worst period of lockdown restrictions, contract cancelations and the slight increase in delinquency were not meaningful. Fitch projects a resumption of growth and increase in the car and �eet rental industry penetration from 2021, as a result of mass vaccination, new mobility habits, and companies choosing to lease and preserve liquidity.
Parent and Subsidiary Linkage: Fitch rates Movida on a standalone basis but acknowledges that Simpar's ownership has bene�ted the company's �nancial �exibility. In addition to its 55.1% controlling stake, Simpar determines the business and �nancial strategies of Movida, selects its management, and has some freedom to manage its cash as there is no restriction on upstream dividends. Restrictions do apply to intercompany loans.
Movida's ratings re�ect the company's sound capital structure and business pro�le but relatively weaker competitive position when compared with its bigger domestic peer Localiza Rent a Car S.A. (BB/Negative). The company has 280 thousand vehicles, being almost two times bigger than its closest domestic peers, such as Companhia de Locação das Américas - Locamérica e Unidas S.A with 158 thousand cars and Ouro Verde Locacao e Servico S.A. (BB-/Stable) with 22 thousand vehicles.
Fitch believes that Movida's bargaining power and business position is weaker than that of the industry's benchmark, Localiza, but stronger than that of Ouro Verde. Compared with Localiza, Movida has a weaker �nancial pro�le with moderately higher leverage and relatively higher re�nancing risks. Compared with Ouro Verde, Movida has a similar leverage and liquidity position, but a larger scale and stronger business pro�le alongside better access to credit markets.
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
--Average consolidated annual revenue growth at 24% from 2020 to 2022;
--Consolidated EBITDA margin at 21%, on average, from 2020 to 2022;
--Consolidated net capex at around BRL1.2 billion, on average, from 2020 to 2022;
--Cash balance remains sound compared to short-term debt;
--Dividends at 35% net income.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Strengthening of the company's scale and competitive position, without jeopardizing the company's pro�tability or capital structure.
--Improvement in the company's �nancial pro�le, with adjusted net debt / EBITDA below 3.0x on a regular basis.