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TEXT-Fitch rates Redecard S.A. proposed debt
April 5, 2012 / 9:37 PM / 6 years ago

TEXT-Fitch rates Redecard S.A. proposed debt

(The following statement was released by the rating agency)

April 5 - Fitch Ratings has affirmed Redecard S.A.’s investment grade Foreign and Local currency Issuer Default Ratings (IDR) at ‘BBB+’ and the Long-term national scale rating at ‘AAA(bra)'. The Rating Outlook for the corporate ratings is Stable. In conjunction with these rating actions, Fitch has assigned an ‘AAA(bra)’ National scale rating to Redecard’s proposed first debentures issuance of BRL1.5 billion, due in 2017. The debentures are simple, non-convertible and interest rates may be renegotiated in six months (1st series of BRL500 million), nine months (2nd series of BRL500 million) and 12 months (3rd series of BRL500 million). 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 business position and its capacity to generate strong cash flow in its business. 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 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. Redecard’s classification 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]. 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 competitive environment, maintain relationships with its largest customers, and increase its merchant base in the retail segment. 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, however, 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 and default in the payment of the rental of equipment are below 0.1% of credit card volume and losses are less than 1% of net revenues. Increasing Competition Presents Challenges Redecard is the second largest merchant-acquiring and payment-processing company in Brazil, with an estimated market share of 40% based on the value of transactions with credit and debit cards. Significant changes in the competitive landscape in the Brazilian card payment industry have occurred since July 2010 as the market opened to competition, which have pressured Redecard’s operating margins. Currently, Redecard and Cielo account for about 93% of the market and, given the barriers to entry, market share losses will likely be limited in the medium term. Redecard has the challenge to continue to increase its participation in the volume of Visa card transactions, offsetting the loss in the volume of MasterCard’s transactions to Cielo. 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 is to preserve low cash position, as the company has satisfactory financial flexibility to quickly build up liquidity, if necessary. As of Dec. 31, 2011, Redecard had cash and market securities of BRL172 million. Redecard continued to generate robust cash flow, despite lower net MDR and average point-of-sale (POS) rentals. In 2011, the company generated BRL2.3 billion in EBITDA, including financial income derived from the discounting and pre-payment of its receivables to its merchants, 66.3% EBITDA margin, and BRL1.9 billion in funds from operations (FFO). These results compare with EBITDA of BRL2.2 billion, EBITDA margin of 68.7% and FFO of BRL1.7 billion in 2010. Working capital requirements significantly increased to BRL1.7 billion in 2011, compared to BRL690 million in 2010. This increase follows the company’s strategy to finance its working capital needs with the issuance of BRL2 billion CP program in April 2011 and to reduce the volume of discounted receivables from the bank card issuers. Historically, Redecard has distributed high dividends of about 90% to 100% of net income; BRL1.2 billion was distributed in 2011. 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. Net revenues reached BRL2.8 billion in 2011, compared to BRL2.6 billion in 2010, and do not include financial income from the prepayment and discounting of receivables owed to merchants. This increase was mostly due to higher volume of debit and credit transactions, as net MDR continued to reduce by 13.6% and 2.5% in credit and debit card transactions, respectively, during the year. The number of POS rental also reduced to 1,066,000 from 1,145,000 in 2010, and average price of POS rental dropped by 10.8%, to BRL55.6 per month. Redecard processed volume of BRL231 billion of credit and debit transactions in 2011, 25% higher than the volume of BRL184 billion in 2010. Financial income from pre-payment transactions of BRL639 million also contributed to the result. Strong customer diversification also supports the ratings. Leverage Should Remain Low 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. The company substituted part of its funding from the discounting and pre-payment of receivables due from card-issuing banks with a BRL2 billion CP program. As of Dec. 31, 2011, total debt was BRL2.4 billion. This funding strategy does not affect the company’s strong credit metrics and leverage (measured by total debt/EBITDA) was 1.1 times (x) in 2011. Low Penetration Underpins Volume Demand The penetration of credit and debit cards in Brazil is low, which supports Redecard’s long-term growth prospects and demand for transaction volume, despite the more competitive environment. The card market in Brazil has achieved significant growth in recent years and, according to the Brazilian Association of Credit Card Companies, the volume of transactions carried out with cards should reach BRL668 billion in 2011. Despite the consistent growth in card payment penetration in Brazil, it remains well below other developed countries. The increase in bank account penetration and credit, higher personal spending, increasing consumer acceptance of credit cards, and movement to a more formal marketplace are the main drivers that should support continued growth of the market. Potential Rating or Outlook Drivers 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 ‘BBB+'. 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 or not guaranteed by Mastercard; by a significant volume losses and/or sharp reduction in operational margins due to increased competition; by lower-than-expected consumer expenditures and GDP growth; 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 new competitive environment and significant changes in the regulatory risk. (Caryn Trokie, New York Ratings Unit)

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