Fitch Rates Cielo S.A.'s IDR and Proposed Notes 'BBB+'; Outlook Stable
RIO DE JANEIRO, Brazil -- November 01, 2012
Fitch Ratings has assigned the following ratings to Cielo S.A. (Cielo) and its
subsidiary Cielo USA Inc.:
--Foreign currency Issuer Default Ratings (IDR) 'BBB+';
--Local currency IDR 'BBB+';
--Long-term national scale rating 'AAA(bra)'.
Cielo USA Inc.
--Foreign currency IDR 'BBB+';
--Proposed Senior unsecured notes 'BBB+'.
The Rating Outlook for the corporate ratings is Stable.
Cielo's investment grade ratings reflect the company's leading position in the
Brazilian card payment industry and the strength and resilience of its
business model, which is supported by the growing and predictable revenue
stream from a diversified base of affiliated merchants. Cielo has a solid
capital structure, liquidity position, and the ability to generate strong and
resilient cash flow in its business.
Cielo's ratings also incorporate the low counterparty risks associated with
the Brazilian banking system, as more than 95% of credit and debit
transactions are settled with investment grade banks. The support and the
strength of its controlling shareholders, Banco Bradesco S.A. (Bradesco)
[rated 'AAA(bra)' National Scale; local currency IDR 'A-' and foreign currency
IDR 'BBB+' by Fitch] and Banco do Brasil S.A. (Banco do Brasil) [rated
'AAA(bra)' National Scale; local and foreign currency IDR 'BBB' by Fitch] are
also incorporated in the ratings. Cielo's ratings are not limited by the
credit profile of one of its main shareholders, Banco do Brasil, as it divides
the control of the company with Bradesco and its access to Cielo's cash flow
is restricted to dividends.
The Brazilian card payment industry has high barriers to entry, which support
Cielo's strong market position. Fitch views Cielo's business model as
sustainable over the medium term, despite the highly competitive environment.
Cielo's strong competitive advantage in the industry relies, among other
factors, on the relationship and distribution network of four important banks
in the Brazilian financial system.
Cielo USA Inc. is a wholly owned subsidiary of Cielo. The proposed senior
unsecured notes of approximately USD750 million to USD1 billion are
unconditionally and irrevocably guaranteed by Cielo. The use of proceeds are
for debt refinancing and for general corporate purposes. The credit quality of
Cielo and Cielo USA Inc. have been linked according to Fitch's 'Parent and
Subsidiary Rating Linkage' criteria report dated Aug. 8, 2012.
Leading Position in the Brazilian Card Payment Industry:
Cielo is the leading company in the merchant acquiring and payment processing
industry in Brazil and in Latin America. The company's estimated market share
of 55% is based on the value of transactions with credit and debit cards.
Currently, Cielo and Redecard account for more than 95% of the market and
given the barriers to entry, Fitch does not expect a material reduction in its
market share over the medium term. The penetration of credit and debit cards
in Brazil is low, which supports Cielo's long-term growth prospects, and
despite the more competitive environment; Cielo's strategy to preserve margins
may result in a moderate reduction of market share in the short term.
Cielo affiliation with several of the leading banks in Brazil, gives it access
to their broad customer base to acquire merchants accounts and creates high
barriers to entry; approximately 60% of merchant accounts are established
through affiliations with banks. Cielo has a strong competitive advantage, as
the company relies on the strong relationship and distribution network of
Banco do Brasil, Bradesco, HSBC and Caixa, with total branches of 13,266
(about 60% of the Brazilian banking system). Although Fitch does not expect a
significant change in the Brazilian card payment industry in the short term,
the uncertainties about the new entrants to the market and also possible new
regulatory requirements will be closely monitored.
Low Risk of Credit Loss:
Cielo currently has virtually no direct credit exposure to cardholders, as the
card-issuing bank guarantees cardholder's payment. The company is, however,
exposed to card-issuing bank defaults on a payment settlement for Visa
transactions. The licensing agreement with Mastercard mitigates this risk, as
it guarantees the settlement of all transactions. The risk associated to Visa
transactions is mitigated by the fact that more than 95% of the volume of
credit and debit transactions is concentrated in investment grade banks. For
non-investment grade banks, Cielo's prudent risk management policy requires
the card-issuing bank to pledge collateral.
Historically, Cielo has reported very low credit losses. The company is
exposed to merchants that accept cards processed by Cielo in terms of their
performance, payment of the rental of the equipment, fraud, and losses due to
customer charge-backs. Nonetheless, loss from transactions that result in
fraud, charge-backs, cancellation of sales by merchants and default in the
payment of the rental of equipment represented less than 1% of net revenues.
Low Liquidity Risk:
Cielo's liquidity is solid. As of Sept. 30, 2012, Cielo had cash and
marketable securities of BRL393 million and the company has strong financial
flexibility to quickly build up a cash cushion if necessary.
During the latest 12 months (LTM) ended September 2012, Cielo generated BRL3.7
billion of adjusted EBITDA, including financial income derived from the
discounting and pre-payment of its receivables to its merchants, BRL2.4
billion in funds from operations (FFO) and BRL1.9 billion in cash flow from
operations (CFFO). These results compare with BRL3 billion, BRL2 billion and
BRL1.8 billion, respectively, in 2011.
High dividends and the company's acquisition strategy have pressured the
company's free cash flow. In the LTM ended September 2012, investments totaled
BRL1.4 billion and dividends totaled BRL1.4 billion. In July 2012, Cielo
acquired a 100% participation in an American company, Merchant e-Solutions
(MeS), for USD670 million (BRL1.365 billion), which was partially financed
with debt. MeS should positively contribute to Cielo's growth strategy. Cielo
has a minimum dividend distribution policy of 50% of net income and in 2011,
the company distributed dividends of about 70% of net income.
Recurring and Growing Revenues:
Cielo's business model is stable, with a low correlation to economic cycles.
The revenue growth is generally driven by the increasing migration to an
electronic payment system from a cash system and increasing card payment
penetration in Brazil. In the LTM ended September 2012, net revenues was
BRL5,024 million, compared to BRL4,209 million in 2011, and does not include
financial income from pre-payment of payables to merchants. Cielo processed
volume of BRL316 billion of credit and debit card transactions in 2011, and
BRL276 billion in the first nine months of 2012. In 2011, revenues from the
rental of POS equipment equaled BRL1.1 billion and financial income from
pre-payment/discounting of payables to merchants equaled BRL587 million and
also contributed to growth. Strong customer diversification also supports the
Significant changes in the competitive landscape in the Brazilian card payment
industry have occurred since July 2010 as the market opened up to competition,
which has pressured Cielo's operating margins. In the LTM ended September
2012, adjusted EBITDA margin was 63.5%, compared to 67.2% in 2010. Fitch does
not expect a significant reduction in net merchant discount rate (MDR) and
adjusted EBITDA margins should remain around 63% over the near term.
Leverage to Remain Low:
Cielo's leverage is low. As of Sept. 30, 2012, total debt was BRL1,121
million, composed of a bridge loan of USD400 million to finance the MeS
acquisition and FINAME loans of BRL310 million to finance the purchase of POS
equipment. In the LTM ended September 2012, total debt to adjusted EBITDA
ratio was 0.3x, compared to 0.1x in 2011. Leverage should increase to about
0.6x following the proposed issuance of approximately USD750 million to USD1
billion; leverage is not expected to materially change over the next few
years. The proceeds will used to repay the bridge loan issued to finance MeS
acquisition, and for future working capital needs.
Potential Rating or Outlook Drivers:
Ratings upgrades are not likely in the short to medium term. Cielo's IDRs are
already positioned at the same level of Brazil's country ceiling of 'BBB+'.
Ratings downgrades would most likely be driven by an increase in the volume of
credit and debit transactions with non-investment grade banks or not
guaranteed by Mastercard; by a weakening credit profile of the main banks that
operate with Cielo; and/or by a significant loss due to fraud and
charge-backs. Factors that could lead to consideration of a Negative Outlook
or downgrade also include effects on the business caused by the competitive
environment and significant changes in the regulatory risk.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria
Parent and Subsidiary Rating Linkage
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