Moody's downgrades Votorantim Cimentos' ratings to Ba2, outlook is negative

Moody's Investors Service downgraded Votorantim Cimentos SA's senior unsecured rated debt to Ba2 from Baa3. At the same time, Moody's withdrew Votorantim Cimentos' issuer rating and assigned a Ba2 Corporate Family rating. The outlook was changed to negative.

The rating action follows Moody's downgrade on 24 February 2016 of Brazil's government bond rating to Ba2 from Baa3. In addition, Moody's downgraded the country's senior unsecured debt rating to Ba2 from Baa3 and the senior unsecured shelf rating to (P)Ba2 from (P)Baa3. The outlook was changed to negative. The rating agency also changed Brazil's country ceiling from Baa2 to Ba1.

"The downgrade of Votorantim Cimentos' ratings was prompted by the downgrade of Brazil's government bond rating to Ba2 from Baa3," explained Moody's VP Senior Analyst, Marcos Schmidt.

The rating's agency added that Votorantim Cimentos' Ba2 ratings continue to reflect the company's leading position in the Brazilian cement market, strong credit metrics, adequate liquidity, as well as its large scale and integrated operations, which translate into leading market share and above-average EBITDA margins when compared to global peers. The ratings also take into consideration the company's affiliation with Votorantim SA (Ba2, Negative) and its relevance to the parent company, as it contributes with 57 per cent of its total EBITDA generation, as of September 2015.

A statement by Moody's noted that Votorantim Cimentos has a good liquidity profile, based on the maintenance of a large cash balance relative to short-term debt. Cash balance of BRL3.6bn (US$0.9bn) as of September 2015 covers short-term debt by almost 2.6x. Moreover, the company has revolving credit facilities amounting to US$882m (BRL3.5bn) with maturity in 2019 and 2020.

Votorantim Cimentos also has a comfortable amortisation schedule with an average debt maturity of 9.6 years and funding mix mainly concentrated in bonds (54 per cent of total reported debt) and debentures (22 per cent of total reported debt), as of September 2015.

Constraining the ratings are the still-modest operating performance in the United States, Europe and Asia, economic slowdown and corruption investigations affecting the heavy construction market in Brazil, and CADE's (Brazil antitrust authority) decision to rule against the largest cement companies in the country, including Votorantim Cimentos, which was convicted for cartel formation and fined approximately BRL1.5bn. As part of CADE's decision the company would also be obliged to sell certain assets. The company denied its involvement in cartel practices and judicially appealed to the imposed sanctions, but it is uncertain how long the appeal process will take. In 2015 Votorantim Cimentos was granted with an injunction suspending the effects of CADE's decision until final judgment, however CADE may appeal.

The negative outlook reflects the change in outlook of Brazil's government bond rating to negative, and our expectations that market conditions for cement producers in Brazil will remain challenging.

An upgrade of Votorantim's ratings would depend on an upgrade of Brazil's government bond rating, and improvements in the conditions for the Brazilian cement industry in which the company is able to better its operating performance such that adjusted EBIT to interest expense is sustained above 4.0x (2.0x in the last 12 months ended September 2015) and adjusted retained cash flow (RCF) to net debt increases to levels above 20 per cent (10.9 per cent in the LTM ended September 2015), while decreasing leverage to below 3.5x (5.1x in the last 12 months ended September 2015). All ratios incorporate Moody's standard adjustments.

The ratings could be downgraded if Brazil's government bond rating should be further downgraded, or if the company's liquidity profile deteriorates or if its capital structure weakens, with adjusted debt- to-EBITDA ratio above 5.0x after the execution of the expansion plans without prospects for reduction. Performance falling below expectations, indicated by retained cash flow (RCF) to net debt below 10 per cent for a sustained period could also lead to negative rating actions, Moody's added.