April 5, 2012 / 3:42 PM / 5 years ago

TEXT-Fitch affirms Cimento Tupi's ratings

April 5 - Fitch Ratings has affirmed the following ratings of Cimento Tupi
S.A.'s (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 'BBB-(bra)'.	
	
The Rating Outlook is Stable.	
	
Tupi's 'B' ratings reflect its small business position, execution risks related
to the change in its business model, and the volatility of its cash flow
generation due to the cyclicality of the cement industry. The ratings
incorporate the company's success at raising USD150 million to fund its
expansion plan. The ability to complete this project within the budget and on
time (by 1Q'13) will be key to avoiding pressure on the ratings. Tupi's low
liquidity position going forward and working capital refinancing risks are also
factored in the ratings.	
	
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; Schedule On Time	
	
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 by 2013 from 2.4 million. The success of this
expansion is crucial to the company's ongoing activities. Absent this expansion,
Fitch estimates that the company's nominal annual capacity would be reduced to
1.6 million tons.	
	
Limited Short Term Cash Flow Expansion	
	
Tupi generated BRL64 million of EBITDA and BRL70 million of funds from
operations (FFO) during 2011. These figures compare with BRL54 million and BRL53
million in 2010, respectively, and compare favorably versus an average EBITDA of
BRL38 million and an average FFO of BRL37 million between 2007 and 2009. Free
cash flow (FCF), defined as cash flow from operations less dividends and
investments, was BRL14 million in 2011. For 2012, Fitch expects Tupi's EBITDA to
be about BRL65 million, considering the limited production capacity. FCF will
likely be negative in 2012 due to the large level of capital expenditures
(BRL171 million).	
	
Leverage Trending Up; FX Risks	
	
Tupi's credit metrics will be under pressured until 2013 due to the
aforementioned capital expenditure plan (USD150 million). In May 2011, the
company issued a USD100 million note. During 2012, they did an add-on issuance
of USD50 million, which was key to supporting the capex program and diminishing
refinancing risks. In 2011, Tupi's FFO adjusted leverage ratio was 3.2 times
(x), while its total debt/EBITDA ratio was 4.3x and its net debt/EBITDA ratio
was 3.5x. Fitch expects leverage to increase to around 4.5x in 2012 and return
to below 4.0x in 2013 when the expansion project should be completed.	
	
Tupi is exposed to currency mismatch risks. About 65% of its debt is denominated
in USD, and 100% of its cash flow generation is in local currency. As of Dec.
31, 2011 Tupi's total debt was BRL277 million. This debt basically consists of
BRL179 million (USD100 million) of unsecured notes due during 2018, BRL59
million of banking loans and BRL38 million of tax refinancing. The additional
USD50 million of debt associated with the reopening will further increase the
company's exposure to a strengthening U.S. dollar. In the short-term, the
company partially mitigates this risks with cash held abroad, but as soon as it
disburses this cash for the project it will not have this protection.	
	
Shrink in Liquidity Position Expected	
	
Tupi's liquidity position should show deterioration going forward in 2012. In
December 2011, Tupi had BRL52 million in cash and marketable securities and
BRL49 million of short-term debt. Out of the short-term portion, BRL43 million
is related to banking loans and BRL6 million of taxes financing. The levels of
short-term debt coverage, as measured by cash plus funds from operations (FFO)
to short-term debt and cash plus CFFO to short-term debt, were 2.2x and 2.9x,
respectively.	
	
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
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 impacted materially by the high level
of infrastructure projects in Brazil, as it is more linked with unemployment and
income levels.	
	
Key Rating Drivers	
	
A ratings downgrade or Negative Outlook could result from a delay in the
expected timing of the expansion program. 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 short to medium term.	
	
	
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. 12, 2011);	
--'National Ratings - Methodology Update' (Jan. 19, 2011).	
	
Applicable Criteria and Related Research:	
Corporate Rating Methodology	
National Ratings Criteria

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