Fitch Ratings has assigned the following ratings to Brazilian producer Cimento Tupi S.A. (Tupi):
-- Foreign Currency Issuer Default Rating (IDR) ’B’;
-- Local Currency IDR ’B’;
-- Long-Term National Rating ’BBB-(bra)’.
Fitch has also assigned a ’B/RR4’ rating to Tupi’s proposed US$150m senior unsecured note issuance due 2021. The proceeds from this issuance will be used to refinance existing debt and to fund a portion of the company’s expansion plan.
Tupi’s ratings reflect the volatility of its cash flow generation due to the cyclicality of the cement industry, Fitch writes. The ratings also take into consideration the highly competitive market, where the leaders are larger integrated groups with more efficient cost structures, greater geographic diversification and higher credit quality. The profile of these companies could lead to pricing pressure. While Tupi’s credit metrics are currently strong for the rating category, they should weaken in the near term due to the company’s large capital expenditure plan. This program is largely in response to a change in Tupi’s business model that will result from Companhia Siderurgica Nacional S.A’s (CSN) decision to discontinue supplying the company with slag. This supply agreement is currently guaranteed by a court settlement until April 2012.
Positively, the ratings incorporate the favorable outlook for the cement sector in Brazil during the near- and medium-term as well as the brand recognition for Tupi’s products. The high level of demand should be driven by large infrastructure investments and a growing housing market. These factors should result in a favorable pricing market and high capacity utilizations. Some of the benefits of the growth in demand to Tupi could be tempered, however, by the aggressive expansion activities of several competitors.
Tupi’s business model has always been based on contracts with CSN, a leading Brazilian steel company who has also entered the cement business, for the supply of slag at competitive prices.