Fitch Affirms Cimento Tupi's Ratings
RIO DE JANEIRO -- March 28, 2013
Fitch Ratings has affirmed the following ratings of Cimento Tupi S.A. (Tupi):
--Foreign currency Issuer Default Rating (IDR) at 'B';
--Local currency IDR at 'B',
--Senior unsecured notes due 2018 at 'B/RR4';
--Long-Term National rating at 'BBB-(bra)'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Tupi's 'B' ratings reflect the execution risks related to the change in its
business model, the volatility of its cash flow generation due to the
cyclicality of the cement industry, as well as its small business position in
an industry dominated by larger competitors. Tupi's low liquidity position
relative to short-term debt is also factored into the ratings.
Uncertainties due to the delay in the company's startup of its new cement
plant further heighten risk. Tupi is expected to receive government licenses
to start operation of its Pedra do Sino kiln during May. Receiving the
approval in a timely manner will be crucial to avoiding a future downgrade, as
the company's size is not sufficient to support its debt obligations over the
medium term without the sales volumes that are projected to result from the
Weak Business Profile:
Tupi's small production scale and its lack of geographic diversification
heighten the risk of its exposure to the volatility of the cement industry.
Tupi's cost structure is higher than the largest integrated Brazilian cement
producers. The strong credit profile of these large companies could allow them
to pressure prices during a downturn in the industry in an attempt to sustain
volumes, which would negatively affect Tupi's ability to service its debt.
Business Model Shift a Challenge; Behind Schedule Heightens Risks:
The company is currently implementing a new operating model. This is a result
of the termination of a supply agreement, effective April 2012, for slag from
Companhia Siderurgica Nacional S.A. (CSN), a large Brazilian steel company,
which is increasing its presence in cement. Tupi's strategy is to expand its
unit at its Pedra do Sino plant, which will significantly reduce the company's
reliance on slag and increase total overall nominal production capacity to 3.2
million tons of cement per year from 2.4 million. Absent this expansion, Fitch
estimates that the company's nominal annual capacity would be reduced to 1.6
million tons. Tupi has already run out of slag inventories and currently faces
challenges to find alternative suppliers to maintain current production
Operational Constrains Continue to Limit Cash Flow Expansion in 2013:
Under current conditions, Fitch foresees limited room for growth in 2013. Tupi
generated BRL66 million of EBITDA and BRL41 million of funds from operations
(FFO) during 2012. This was quite in line with the agency's expectations,
considering the lack of raw material (slag). Free cash flow (FCF), defined as
cash flow from operations less dividends and investments, was negative BRL202
million as a result of its expansion project (BRL220 million) and dividends
(BRL15 million). If the Pedra do Sino project fails to start operations until
July, Fitch expects Tupi's EBITDA to be similar to 2012. FCF will likely be
negative by about BRL50 million during 2013 due to high capex.
Leverage Trending Up; FX Risks:
Tupi is exposed to currency mismatch risks. About 63% of its debt is
denominated in USD, and 100% of its cash flow generation is in local currency.
As of Dec. 31, 2012, Tupi's total debt was BRL470 million, basically
consisting of BRL297 of the bond issuance, BRL103 million of banking loans and
BRL34 million relative to tax financings.
Tupi forecasted BRL250 million of capex for its expansion plan. Expenses
related to the expansion project have increased to about BRL350 million. This
cost overrun, along with a weaker foreign exchange rate that increased its
debt levels in terms of Brazilian reais, have resulted in leverage levels
higher than projected. During 2012, Tupi's net leverage ratio was 6.7x.
Fitch's base case forecasts this ratio will climb to 7.7x in 2013. If the
company is able to get the new mill operating in the middle of 2013, it should
be able to achieve sales volumes in 2014 that would allow it to lower its
leverage ratio to 4.5x during 2014.
Tupi's liquidity position is quite weak. As of Dec. 31, 2012, Tupi had BRL109
million of short-term debt and BRL23 million of cash and marketable
securities. Out of the short-term debt figure, BRL97 million is related to
banking loans. Most of this debt was raised during 2013 and Fitch expects it
to be rolled over. The level of Tupi's short-term debt coverage, as measured
by cash plus FFO/short-term debt) was weak at 0.6x.
Favorable Prospects for the Sector Should Sustain Cement Prices:
The positive outlook for the cement sector in Brazil, reflecting the expansion
of the real estate segment and infrastructure projects, should also favor
Tupi's operations, which are largely dependent upon favorable prices and high
capacity utilization levels. Profitability margins should remain relatively
flat, however, as a lot of new capacity is being added by the leading cement
producers. Tupi's end-market, which is highly oriented toward the
refurbishment and construction of homes, should not be affected materially by
the high level of infrastructure projects in Brazil, as it is linked more with
unemployment and income levels.
A ratings downgrade could result from further delays in the inauguration of
its new kiln. A significant deterioration in the company's cash flow
generation and operating margins due to a downturn in the Brazilian market
would also pressure the ratings. Given current challenges related to a shift
in its business model, an upgrade of Tupi's ratings is unlikely in the
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. 08, 2012);
--'National Ratings - Methodology Update' (Jan. 19, 2011).
Applicable Criteria and Related Research
National Ratings Criteria
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. 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.
Debora Jalles, +55-21-4503-2629
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP:
Liliana Yabiku, +55 -11- 4504-2205
Ricardo Carvalho, +55-21-4503-2627
Elizabeth Fogerty, +1-212-908-0526 (New York)
Press spacebar to pause and continue. Press esc to stop.