Fitch Affirms Localiza's IDRs at 'BBB-'; Outlook Revised to Positive
RIO DE JANEIRO -- December 05, 2012
Fitch Ratings has affirmed the following ratings of Localiza Rent a Car S.A.
--Foreign currency Issuer Default Rating (IDR) at 'BBB-';
--Local currency IDR at 'BBB-';
--Long-term National Scale Rating at 'AA+(bra)';
--Unsecured fifth debenture issuance at 'AA+(bra).
Fitch has simultaneously assigned an 'AA+(bra)' rating to Localiza's unsecured
sixth debenture issuance due in 2019 in the amount of BRL300 million. The
issuances proceeds will be used to refinance indebtedness.
The Rating Outlook for Localiza has been revised to Positive from Stable.
The Outlook revision reflects Fitch's expectation that Localiza's performance
will weather the current scenario of slower economic growth without damaging
its consistent performance and credit metrics. Localiza should also benefit
from higher GDP growth and economic activity in 2013, and if this occurs the
company's ratings could improve.
Localiza's investment grade rating reflect its very strong business position
within the car and fleet rental industry in Brazil and its track record of a
conservative capital structure. Localiza has proven that its business model
has consistently allowed the financial flexibility to adjust to changes in the
economic cycle while preserving its capital structure and credit metrics. The
ratings also incorporate favorable growth prospects for the industry in
COMPETITIVE ADVANTAGES SUPPORT STRONG BUSINESS PROFILE
Localiza has a very strong competitive position within the car and fleet
rental industry with a market presence that is nearly four times larger than
its closest competitor. The company's position gives it a strong negotiating
position with the automobile manufacturers, enabling it to efficiently dilute
fixed costs. Localiza's prominent used car sales distribution channel further
supports its competitive advantages and enhances financial flexibility. The
company has a low cost of financing due to its strong access to the local debt
markets, which further improves its competitiveness.
WELL-POSITIONED TO FACE INDUSTRY'S RISKS
Competition is likely to increase while inflation costs already pressure
Localiza`s operating profitability. The company continues to seek scale gains
and to reduce its financial costs in order to offset some loss in operating
margin as a result of its strategy of maintaining market share. The company
also faces changing dynamics in the automotive industry in Brazil. Localiza's
solid business expertise and its conservative approach on the pricing strategy
will be fundamental to avoiding a deterioration of its profitability.
Localiza's performance is partly associated with its pricing strategy for
selling used vehicles. An increase in competition among the automobile
manufacturers in Brazil, as a result of the increasing participation of the
Asian players, may lead to a downward trend for vehicle prices.
CASH FLOW EXPANSION AND FINANCIAL FLEXIBILITY PERSIST
Localiza continued to improve its operating cash flow generation during 2012,
although at lower growth rates. Lower GDP growth and stronger competition has
somewhat limited further business expansion. Net revenue grew 10% from 2011 to
Sept. 30, 2012 (LTM), reaching BRL3.1 billion, while operating fleet growth
was 5%. In the same period, EBITDAR and funds from operations (FFO) increased
to BRL967m and BRL658 billion, compared with BRL903mm and BRL821m. During
2010, these figures were BRL720m and BRL649m, respectively. The greater costs
with personnel and store rentals have been pressuring Localiza's operating
margins over the recent quarters and may pressure overall margins after 2013.
Over the last 12 months period ended Sept. 30 2012, EBITDAR margin remained
relatively stable at 30.8%, which is still quite consistent with its
historical range from about 29% to 31%.
The car and fleet rental industry demands significant investments in fleet
renewal and for business growth. The company has successfully developed an
asset sales strategy that allows it to sell around 70,000 used vehicles per
year. This has enabled the company to sell vehicles consistently, including
during the difficult first half of 2009. The proceeds of car sales have
largely funded fleet renewal, given the significant discounts achievable from
auto manufacturers for new vehicles. The potential market value of its
relatively modern vehicle fleet is about 1.8x the value of its net debt.
Localiza could monetize these assets in the event of a cash flow crisis, since
they are not linked to guarantees. During Sept. 30, 2012 (LTM), capex for
fleet renewal totaled BRL1.5 billion, and capex for growth reached BRL200
million. To offset these disbursements, inflow of resources from used car
sales were BRL1.5 billion.
STRONG LIQUIDITY POSITION
Localiza has consistently maintained a strong liquidity position. On Sept. 30,
2012, the company had total debt of BRL1.8 billion and had cash and marketable
securities of BRL429 million. On a pro forma basis considering a recent
debentures issuance (BRL300 million) used to prepay debt, Localiza shows a
quite strong debt schedule amortization, with BRL429 million in cash and only
BRL302million of debt coming due until 2015.
CREDIT METRICS COMPATIBLE WITH THE INVESTMENT GRADE LEVEL
The company has a track record of strong credit protection measures for the
industry. From 2008 through the LTM ended Sept. 30, 2012, Localiza's FFO
Adjusted Leverage averaged 2.6x, while the averages for its total adjusted
debt/EBITDAR ratio was 2.8x and its net adjusted debt/EBITDAR ratio was 2.3x.
The company's debt consists primarily of debenture issuances (56%) in domestic
market and local banking credit lines (44%). Fitch expects Localiza to keep a
net adjusted debt-to-EBITDAR ratio below 2.5x in the long term.
KEY RATING DRIVERS
An upgrade of Localiza's ratings should occur if the company continues to
sustain its conservative credit metrics, financial flexibility and strong
business profile. The ratings could be downgraded due to a combination of
higher leverage, lower liquidity, a negative economic outlook for Brazil, or a
significant deterioration of the used car market in Brazil.
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).
Applicable Criteria and Related Research:
Corporate Rating Methodology
ALL 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
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.
Debora Jalles, +55-21-4503-2629
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20
Centro - Rio de Janeiro - RJ
Mauro Storino, +55-21-4503-2625
Ricardo Carvalho, +55-21-4503-2627
Elizabeth Fogerty, +1-212-908-0526
Press spacebar to pause and continue. Press esc to stop.