Fitch Downgrades USJ's IDRs to 'CC'

NEW YORK & SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings has downgraded the Foreign and Local currency Issuer Default Ratings (IDRs) of U.S.J. - Acucar e Alcool S.A. (USJ) to 'CC' from 'CCC' and the company's USD275 million senior unsecured notes due 2019 to 'CC/RR4' from 'CCC/RR4'. Fitch has also downgraded the National Scale Rating to 'CC(bra)' from 'CCC(bra)'. A complete list of all rating actions can be found at the end of this release.

KEY RATING DRIVERS

The downgrade reflects Fitch's expectations that USJ's liquidity will remain under increased pressure due to escalating concentration of short-term debt and its inability to generate positive free cash flow (FCF). The rating action also incorporates USJ's difficulties in monetizing its land bank which are the result of the unfavorable macroeconomic conditions in Brazil.

The company has not reported any improvement of its capital structure in the past months and now faces a coupon payment of USD14 million on November 9 for its USD275 million senior secured notes due 2019. USJ has been burning cash quickly while the availability of working capital financing has become scarcer for Brazilian Sugar and Ethanol (S&E) companies due to the increased systemic risk that followed the restructuring of other companies in the sector.

The company has not reported relevant land sales in the ongoing season until now and this is holding back the needed increase in USJ's liquidity. While other properties are more liquid, Fitch views the amounts involved in the sale of arable land in the State of Goias as insufficient to materially change the company's liquidity position.

KEY ASSUMPTIONS

--Crushed sugar cane volumes of 3.2 million tons in 2015/2016 and gradual increases of 5% thereafter;--Mix relatively unchanged at 66% sugar and 34% ethanol for the projected period;--Average sugar prices at USD13 cents/pound in 2015/2016, USD15 cents/pound in 2016/2017 and USD16 cents/pound onward;--Domestic ethanol prices keeping their historical correlation with international sugar prices;--No dividends coming from SJC Bioenergia (SJC)in 2015/2016;--Up to BRL60 million in land sales in the State of Goias have been forecast for 2015/2016.

RATING SENSITIVITIESUSJ's inability to improve its liquidity risk in the coming months could lead to a negative rating action. A positive rating could occur should the company be able to monetize land properties and improve its cash-to-short-term debt position considerably.

LIQUIDITY

Fitch forecasts negative FCF at BRL41 million for fiscal 2016 and FCF turning positive only in fiscal 2017. In the last 12 months ended June 30 2015, the company posted cash flow from operations (CFFO) of BRL135 million, which was not enough to cover capital expenditures of BRL215 million, leaving FCF at negative BRL82 million. Final cash position was further pressured by BRL84 million injected into SJC Bioenergia S.A (SJC), the joint venture with Cargill. Capex should be reduced to BRL105 million for fiscal 2016 and no additional capital injections into SJC are expected.

Fitch expects USJ to report cash-to short-term debt coverage below 0.40x as of Sept. 30 2015. As of June 30 2015, USJ's cash position of BRL116 million and short-term debt of BRL296 million compared unfavorably with the cash of BRL201 million and short-term debt of BRL285 million reported for March 31, 2015.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following:

--Foreign and local currency IDRs to 'CC' from 'CCC';--National Scale rating to 'CC(bra)' from 'CCC(bra)';--USD275 million senior unsecured notes due 2019 to 'CC/RR4' from 'CCC/RR4'.

Additional information is available on www.fitchratings.com

Applicable CriteriaCorporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362Evaluating Corporate Governance (pub. 12 Dec 2012)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649

Additional DisclosuresDodd-Frank Rating Information Disclosure Formhttps://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993119Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993119Endorsement Policyhttps://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151029006584/en/

Fitch Ratings
Media Relations
Alyssa Castelli, New York
Tel: +1 (212) 908 0540
Email: [email protected]
or
Primary Analyst
Claudio Miori
Associate Director
+55 11 4504-2207
Fitch Ratings Brasil Ltda
Alameda Santos, 700 - 7 andar, Sao Paulo, SP - CEP 01418-100
or
Secondary Analyst
Alexandre Garcia
Associate Director
+55 11 4504-2616
or
Committee Chairperson
Mauro Storino
Senior Director
+55-21-4503-2625

Source: Fitch Ratings

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