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Fitch Affirms Redecard's IDR at 'BBB+'; Outlook Stable

  Fitch Affirms Redecard's IDR at 'BBB+'; Outlook Stable  Business Wire  RIO DE JANEIRO -- April 3, 2014  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 investment grade ratings reflect the company's strong position in the Brazilian card payment industry and the strength and resilience of its business model supported by the growing and predictable revenue stream from a diversified base of affiliated merchants. Redecard has a solid capital structure and liquidity, and the ability 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 support and strength of its controlling shareholder, Itau Unibanco Holding S.A. (IUH) (rated 'AAA(bra)' National Scale; local currency IDR 'A-' and foreign currency IDR 'BBB+' by Fitch), is also incorporated in the ratings.  Strong Position in the Brazilian Card Payment Industry  Redecard is the second largest merchant-acquiring and payment-processing company in Brazil, with relevant participation in volume of credit and debit cards transactions. The industry is extremely consolidated and the two largest players, Redecard and Cielo S.A., account for more than 90% of the market. 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 has an important competitive advantage, as the company relies on the strong relationship and distribution network of IUH, Banco Safra S.A. and Caixa Economica Federal. Together these banks have approximately 7,294 branches. They account for about 32% of the Brazilian banking system. Redecard's affiliation with these leading banks gives it access to their broad customer base to acquire merchants accounts and creates high barriers to entry. The penetration of credit and debit cards in Brazil is still low and should continue to grow in the next few years, which supports the company's long-term growth prospects.  Low Risk of Credit Losses  Redecard currently has virtually no direct credit exposure to cardholders since the card-issuing bank guarantees cardholder 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 with 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, Redecard's risk management policy requires the card-issuing bank to pledge collateral.  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. These losses have been historically low and not representative to the company's net revenues.  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, 2013, Redecard had cash and market securities of BRL186 million. Redecard continued to generate robust cash flow and reported BRL3.2 billion in EBITDA, including financial income derived from the discounting and pre-payment of its receivables to its merchants, and BRL3.2 billion in cash flow from operations (CFFO). Redecard distributed dividends of BRL1.5 billion and invested BRL250 million in 2013, resulting in a strong free cash flow (FCF) of BRL1.4 billion in the period that was used to prepay its first debentures issuance.  Recurring and Growing Revenues  Redecard's business model is stable, with 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. Net revenues was BRL4.1 billion in 2013, compared to BRL3.5 billion reported in 2012, and do not include financial income from pre-payment of payables to merchants.  Credit transactions remained the company's main product and represented about 50% of total revenues, followed by POS equipment rental (28%), debit transactions (19%) and others (3%). Financial income from the discounting and pre-payment of its receivables to its merchants of BRL772 million also contributed to the results. Redecard's operating margins remained high and stable in the last couple of years, even pressured by strong competition in the Brazilian card payment industry. In 2013, adjusted EBITDA margin was 65.8%.  Strong Capital Structure  Redecard has strong credit metrics. As of Dec. 31, 2013, Redecard had BRL427 million of total debt. This debt consists primarily of BRL359 million Finame loans used to finance the purchase of POS equipment. The company's net debt to adjusted EBITDA ratio of 0.1x is low and is not expected to materially change over the next few years.  Manageable Regulatory Risk  In October 2013, Brazil's Central Bank was named as the regulator of the payment processing industry, approved under the law 12,865/2013. Some of the key changes expected by Fitch in the near term include the end of the exclusivity agreements of smaller brands like Elo, American Express, Hiper and food vouchers. As new volume of transactions will be captured and existing volume of transactions will be shared with the market, the impact on the company's cash flow generation capacity should be limited.  RATING SENSITIVITIES  Ratings upgrades are not likely in the short to medium term. Redecard'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 Redecard; and/or by a significant loss due to fraud and charge-backs. Factors that could lead to consideration of a downgrade also include the downgrade of its controlling shareholder, IUH, due to the company's high exposure to the bank; and the effects on the business caused by the competitive environment and/or significant changes in the regulatory risk, that result in EBITDA margins below 50% and negative FCF for consecutive periods.  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 Subsidiary Linkage  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139  Additional Disclosure  Solicitation Status  http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826144  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 DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 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.  Contact:  Fitch Ratings Primary Analyst Fernanda Rezende, +55-21-4503-2619 Director Fitch Ratings Brasil Ltda. Praca XV de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP: 20010-010 or Secondary Analyst Gustavo Mueller, +55-21-4503-2632 Associate Director or Committee Chairperson Ricardo Carvalho, 55-21-4503-2627 Senior Director or Media Relations Elizabeth Fogerty, +1-212-908-0526 elizabeth.fogerty@fitchratings.com  
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