Fitch Downgrades Tonon's IDRs to 'CCC'

SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings has downgraded Tonon Bioenergia S.A's (Tonon) foreign and local currency Issuer Default Ratings (IDRs) to 'CCC' from 'B-'. Fitch has also downgraded to 'CCC/RR4' from 'B-/RR4' the ratings on the company's USD300 million senior unsecured notes due 2020 and the USD230 million senior secured notes due 2024 issued by Tonon's fully-owned subsidiary Tonon Luxembourg S.A. The Rating Watch Negative has been removed.

KEY RATING DRIVERS

The downgrades reflect Fitch's concerns about Tonon's short-term liquidity position and escalating refinancing risks due to its inability to generate positive free cash flows (FCF). The company has not reported any improvement of its capital structure in the past month and faces a coupon payment of USD12 million on May 14 for its USD230 million senior secured notes due 2024.

Systemic risk remains high for Brazil's sugar and ethanol (S&E) sector due to numerous defaults within the sector. Tonon has been finding it difficult to roll over its maturing obligations with new long-term loans as bank lending activity in the sector has been focused on short-term borrowings. The company does not own land properties against which to borrow new medium or long-term loans, which reduces its refinancing prospects and makes the company dependent on the availability of short-term credit lines. As of Dec. 31 2014, Tonon's cash position of BRL159 million unfavorably compared with short-term debt of BRL257 million to yield a 0.62x coverage ratio.

Fitch expects Tonon's net adjusted debt to EBITDAR to reach over 6.0x in March 2015 and stay above 5.0x in March 2016. The company's total adjusted debt as per Fitch's internal criteria amounted to BRL2.3 billion as of Dec. 31, 2014, unfavorably comparing to BRL1.8 billion in March 31, 2014. In the last 12 months ended Dec. 31, 2014, the company's consolidated net adjusted debt/EBITDAR ratio was 4.9x compared with 4.0x in March 2014 and 3.0x in March 2013.

Tonon's FCF should remain negative in fiscal 2016, even with an estimated reduction on capital expenditures to BRL260 million after the end of the capacity expansion. A rebound of international sugar prices is taking much longer to materialize than previously projected and weak currencies further exacerbate low prices. A series of government measures both at the federal and state levels have improved the prospects for the ethanol industry, but the positive short-term impact is expected to be limited. The increase in crushed volumes and generation of more robust operational cash flow in the new season ending March 31, 2016 depends largely on higher international sugar prices and the maintenance of favorable weather conditions as seen in early 2015.

KEY ASSUMPTIONS

--Increased systemic risk and scarce availability of medium and long-term finance;

--Average sugar prices at USD14 cents/pound in 2015/2016, USD16 cents/pound in 2016/2017 and flat at USD17 cents/pound from 2017/2018 on;

--Domestic ethanol prices keeping the historical correlation with international sugar prices.

RATING SENSITIVITIES

Further deterioration of liquidity will lead to a negative rating action.

A positive rating action is unlikely in the short term. In the medium term, a positive rating action will depend on increased bank lending to the sector and higher prices for sugar and ethanol leading to more robust operating cash flows and improved liquidity position for Tonon. A large equity injection or the takeover of the company by a peer would be viewed positively.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'National Scale Ratings Criteria' (Oct. 31, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984610

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Fitch Ratings
Primary Analyst
Claudio Miori, +55-11-4504-2207
Associate Director
Fitch Ratings Brasil Ltda
Alameda Santos, 700 - 7 andar
Sao Paulo, sp CEP 01418-100
or
Secondary Analyst
Alexandre Garcia, +55-11-4504-2616
Associate Director
or
Committee Chairperson
Ricardo Carvalho, +55-21-4503-2627
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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