Fitch Affirms Cielo's IDR at 'BBB+'; Outlook Stable
RIO DE JANEIRO -- October 31, 2013
Fitch Ratings has affirmed Cielo S.A. (Cielo) and its subsidiary Cielo USA
Inc.'s ratings as follows:
--Foreign and local currency Issuer Default Ratings (IDR) at 'BBB+';
--Long-term national scale rating at 'AAA(bra)'.
Cielo USA Inc.
--Foreign currency IDR at 'BBB+';
--Senior unsecured notes at 'BBB+' due in 2022.
The Rating Outlook for the corporate ratings is Stable.
Cielo USA Inc. is a wholly owned subsidiary of Cielo. The aggregate amount of
the senior unsecured notes units is USD875 million. It consists of USD470
million issued by Cielo and USD405 million issued by Cielo USA Inc., which is
unconditionally and irrevocably guaranteed by Cielo. The senior unsecured
notes cannot be sold independently. The credit quality of Cielo and Cielo USA
Inc. has been linked according to Fitch's 'Parent and Subsidiary Rating
Linkage' criteria report dated Aug. 5, 2013.
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.
KEY RATING DRIVERS
Leading Position in the Brazilian Card Payment Industry
Cielo is the leading company in the Brazil's merchant acquiring and payment
processing industry with an estimated market share of 53.5%. The industry is
extremely consolidated with the number two participant, Rede (formally known
as Redecard), having around 40% of the market. 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. Together these banks
have about 13,957 branches. They account for about 62% of the Brazilian
banking system. Cielo's affiliation with these leading banks gives it access
to their broad customer base to acquire merchants accounts and creates high
barriers to entry; approximately 60% of Cielo's merchant accounts are
established through its affiliations with banks. The penetration of credit and
debit cards in Brazil is low, which supports Cielo's long-term growth
prospects. The company's strategy to preserve margins may result in a
reduction of market share in the short term.
Strong Capital Structure
As of June 30, 2013, Cielo had BRL2.3 billion of total debt. This debt
consists primarily of USD875 million of senior notes and BRL389 million FINAME
loans used to finance the purchase of POS equipment. The company's net debt to
adjusted EBITDA leverage ratio of 0.4x is low and is not expected to
materially change over the next few years. Cielo's liquidity position is
strong. As of June 30, 2013, Cielo had cash and marketable securities of
BRL430 million, which compares favorably with BRL221 million of short-term
debt. During the latest 12 months (LTM) ended June 2013, Cielo generated
BRL4.2 billion of adjusted EBITDA, including financial income derived from the
discounting and pre-payment of receivables to merchants, BRL2.8 billion in
funds from operations (FFO) and BRL1.7 billion in cash flow from operations
Free Cash Flow Negative due to Dividends and Acquisitions
Cielo's free cash flow was negative BRL1.4 billion in the LTM. During this
time, the company spent BRL1.5 billion on investments and distributed BRL1.6
billion of dividends. In September 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. Cielo has a
minimum dividend distribution policy of 50% of net income, but has
historically distributed dividends of about 70% of net income.
Recurring and Growing Revenues, Shrinking Margins
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 June 2013, net revenues was BRL6.1
billion, compared to BRL5.4 billion in 2012. These figures do not include
financial income from pre-payment of payables to merchants. Cielo processed
BRL380 billion of credit and debit card transactions in 2012. This figure will
grow in 2013, as the company already had processed BRL204 billion of
transactions in the first half of the year. Revenues from the rental of POS
equipment and financial income from pre-payment/discounting of payables to
merchants also contributed to growth. Cielo's operating margins remain
pressured by higher competition in the Brazilian card payment industry. In the
LTM ended June 2013, adjusted EBITDA margin was 60.7%, compared to 62.5% in
2012 and 67.2% in 2010.
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 with investment grade rated
banks. For non-investment grade banks, Cielo's risk management policy requires
the card-issuing bank to pledge collateral. Cielo 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. These
losses have been historically low, representing less than 1% of net revenues.
Manageable Regulatory Risk
In October 2013, Brazil's Central Bank was named as the regulator of the
payment processing industry, approved under the law 12865/2013. The Central
Bank is expected to publish new regulatory requirements for the sector by the
end of this year. Some of the key changes expected in the near term include
the end of the exclusivity agreements of smaller brands like Elo, American
Express, Hiper and food vouchers. As the participation of these brands in
Cielo's volume of credit and debit transactions is low, the impact on the
company's cash flow generation capacity should be limited.
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 a combination of the
following factors: an increase in the volume of credit and debit transactions
with non-investment grade banks without collateral being pledged by the
card-issuing bank 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'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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