Fitch Affirms Redecard's IDR at 'BBB+'; Outlook Stable
RIO DE JANEIRO -- April 03, 2013
Fitch Ratings has affirmed Redecard S.A.'s ratings as follows:
--Foreign and Local currency Issuer Default Ratings (IDR) at 'BBB+';
--Long-term national scale rating at 'AAA(bra)';
--Long-term national scale rating of its first debentures issuance of BRL1.5
billion, due in 2017, at 'AAA(bra)'.
The Rating Outlook for the corporate ratings is Stable.
KEY RATING DRIVERS
Redecard's ratings reflect the strength and stability of its business model
supported by the predictability of its revenue stream from a diversified base
of affiliated merchants. Historically, the company has preserved solid capital
structure and liquidity, which benefits from its strong presence in the
Brazilian card payment industry and its capacity to generate strong cash flow
in its business. Redecard'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 Brazilian card payment industry's high barriers to entry support
Redecard's strong market position, which is viewed as sustainable in the
medium term, despite the highly competitive environment. Redecard's main
challenges are to consistently add volume to credit and debit transactions,
preserve its market share and net merchant discount rate (MDR) in a more
Redecard's credit profile also benefits from the support and strength of its
controlling shareholder, Itau Unibanco Holding S.A. (Itau) [rated 'AAA(bra)'
National Scale; local currency IDR 'A-' and foreign currency IDR 'BBB+' by
Fitch]. Fitch believes that Itau's increased participation, concluded in
September 2012, contributes to higher integration and synergies between
Redecard and Itau, and the company should benefit from Itau's strong client
Low Risk of Losses and Low Write-Offs
Redecard currently has virtually no direct credit exposure to cardholders and
bank card issuers through its agreement with Mastercard. However, Redecard's
licensing agreement with Visa does not include full guarantee to settle all
credit and debit transactions if a card-issuing bank defaults on a payment
settlement, and this may add some risk to Redecard. This risk is mitigated by
the fact that more than 95% of the volume of credit and debit transactions is
concentrated in investment grade banks.
The company is exposed to merchants that accept cards processed by Redecard in
terms of their performance, payment of the rental of the equipment, fraud, and
losses due to customer charge-backs. Nonetheless, historically, the volume of
transactions that result in fraud, charge-backs, cancellation of sales by
merchants; losses; and default in the payment of the rental of equipment are
low and not representative to the company's net revenues.
Increasing Competition Presents Challenges
Redecard is the second largest merchant-acquiring and payment-processing
company in Brazil, with relevant participation in volume of credit and debit
cards transactions. Given the barriers to entry, market share losses will
likely be limited in the medium term. Although Fitch does not expect a
significant change in the Brazilian card payment industry risk in the short
term, the uncertainties about the new entrants to the market and also new
regulatory requirements will be closely monitored.
Solid Liquidity and Robust Cash Flow
Liquidity risk is low. Redecard's strategy to preserve low cash position is
counterbalanced by company's strong financial flexibility to quickly build up
liquidity from its strong operational cash flow, if necessary. As of Dec. 31,
2012, Redecard had cash and market securities of BRL190 million. Redecard
continued to generate robust cash flow and reported more than BRL2.5 billion
in EBITDA, including financial income derived from the discounting and
pre-payment of its receivables to its merchants, and BRL1.9 billion in cash
flow from operations (CFFO). These results compare favorably with EBITDA of
BRL2.3 billion and CFFO of BRL256 million in 2011. Redecard distributed
dividends of BRL1.1 billion and invested BRL449 million in 2012, resulting in
a free cash flow (FCF) of BRL348 million in the period. Fitch expects the
company to generate strong FCF before dividends, above BRL1.5 billion.
Recurring Revenues Add Stability
Redecard's business model is stable, with low correlation to economic cycles,
as revenue growth is generally driven by the increasing migration to an
electronic payment system and low penetration of credit and debit cards in
Brazil. Net revenues reached BRL3.2 billion in 2012, compared to BRL2.8
billion reported in 2011, and do not include financial income from the
prepayment and discounting of receivables owed to merchants.
The revenue growth in 2012 was mostly due to the increase of 11% in the volume
of debit and credit transactions, to BRL256.6 billion. Credit transactions
remained the company's main product and represented about 49% of total
revenues, followed by POS equipment rental (27%), debit transactions (18%) and
Leverage Should Remain Low
Redecard has strong credit metrics. In 2012, leverage, measured by total
debt/EBITDA and net debt/EBITDA, remained low and was 0.7x and 0.6x,
respectively. Redecard's funding requirements are basically to support the
pre-payment receivables owed to merchants; pre-payments are made at a discount
to the amount owed to the merchant. As of Dec. 31, 2012, total debt was BRL1.9
billion, composed of its first debentures issuance of BRL1.5 billion and
working capital lines. Fitch expects Redecard to conservatively manage its net
leverage below 1.0x in the long term.
Ratings upgrades are not likely in the short to medium term. Redecard's IDRs
are already positioned in the same level of Brazil's country ceiling, of
Ratings downgrades would most likely be driven by a weakening credit profile
of the main banks that operate with Redecard; by an increase in the volume of
credit and debit transactions with non-investment grade banks; and/or by a
significant loss due to fraud and charge-backs. Factors that could lead to a
negative rating action also include effects on the business caused by the new
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).
Applicable Criteria and Related Research
Corporate Rating Methodology
National Ratings Criteria
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