InterCement Brasil S.A. Downgraded To ‘B’ From ‘B+’ On Continuing Challenging Business Conditions And Higher Leverage

• Despite InterCement’s recent asset sales and operations overhaul, performance and leverage should remain weak through 2019 and 2020.
• Cement demand in Brazil, where the company has idled nearly 50% of its capacity would remain flat through 2019. In the meantime, the company’s Argentine operations are struggling with the economic downturn and political uncertainties.
• On July 24, 2019, S&P Global Ratings downgraded the Brazil-based cement producer to ‘B’ from ‘B+’ on global scale and to ‘brA’ from ‘brAA’ on national scale. We also lowered our debt rating to ‘B’ from ‘B+’.
• The stable outlook reflects that the company’s leverage metrics would probably remain close to 5.0x through 2019, improving to 3.5x-4.0x towards 2023. We factor in some level of financial assistance from its parent company, Mover, in case of need.

SAO PAULO (S&P Global Ratings) July 24, 2019–The downgrade reflects InterCement’s likely lower earnings and EBITDA for the next 12 months due to higher risks to the company’s competitive advantages. After the disposal of the Portuguese and Cape Verde operations last year, InterCement’s footprint has shrunk and remains concentrated in Brazil and Argentina, where operating conditions are subpar.

The cement market in Brazil is recovering at a sluggish pace in 2019. We expect InterCement to sell close to 8 million tons of cement in 2019, compared with 12.5 million in 2014 and 2015. Lack of market confidence and significant infrastructure projects are the main factors are behind the market slowdown. In 2020, conditions may slightly improve for long-term investment decisions depending on how the market perceives mid-term risks.

The Argentine subsidiary, Loma Negra, currently generates 55% of total cash flows. Despite volatile economic conditions, with currency swings and high inflation pressuring costs, Loma Negra’s solid market position and the government’s ambitious infrastructure plan allowed the subsidiary to maintain profitable operating margins. InterCement’s main project, L’Amali II, would increase operating efficiency at the Argentine division starting in 2020, but political risks may erode the subsidiary’s capacity to generate hard currency in the future, if economic problems exacerbate under the next administration.

After several changes at Mover subsidiaries’ portfolio, InterCement now accounts for 80%-90% of the group’s EBITDA. Apart from InterCement’s financial obligations, the group also guarantees Estaleiro Atlantico Sul’s (EAS) debt (about R$660 million) and is ultimately responsible for the fine stemming from the leniency agreement fine determined at the E&C subsidiary level (about R$800 million). After the sale of its share at CPFL Energia S.A., Mover repaid almost all of its corporate debt and has currently about R$1.8 billion in cash. Mover is also has a 15% minority interest in CCR S.A., with current market value of about R$4.5 billion.

In December 2018, Mover decided to inject about R$300 million into InterCement. The latter returned the proceeds to Mover after the sale of the Portuguese assets.