Category: Corporates

Brazil, June 30, 2021 – Companhia Siderúrgica Nacional (CSN, Ba3 stable) announced that its fully owned cement subsidiary CSN Cimentos S.A. had entered an agreement to purchase Elizabeth Cimentos S.A. and Elizabeth Mineração Ltda. (collectively, Elizabeth Cimentos) for BRL1.08 billion ($220 million). The deal is credit positive for CSN because the additional capacity in the cement segment will help diversify its cash flow and foster growth, while hardly affecting its balance sheet and liquidity. The acquisition requires customary approvals, including from Brazil’s antitrust authority CADE.

CSN had a robust cash position of BRL18.2 billion at the end of March 2021, including its shares of Usinas Siderurgicas de Minas Gerais (Usiminas, Ba3 stable), and will report historically low leverage and generate free cash flow north of BRL10 billion in 2021, offsetting leverage and liquidity risks coming from this transaction. Additionally, the acquisition could be self-financed at CSN Cimentos’ level, assuming the successful conclusion of the subsidiary’s initial public offering (IPO), which will generate an estimated BRL2.5 billion and give CSN additional flexibility to pursue growth while also reducing debt during the peak of the steel and iron ore industries’ cycle this year.

The transaction involves the acquisition of a plant with an annual production capacity of 1.3 million tons that serves Brazil’s northeastern markets in the states of Paraíba and Pernambuco. This plant complements CSN Cimentos’ existing 4.7 million production capacity in Brazil’s southeast region in the states of Minas Gerais and Rio de Janeiro.

Pro forma for the transaction, CSN’s cement revenue has the potential to increase by about 30%, and the share of the cement segment in CSN’s consolidated results would increase to 3% of total revenue from 2% currently. Although still small relative to the group’s overall size, a larger footprint and scale in the cement business will provide a buffer to CSN’s consolidated cash flow during future downturns in the steel and iron ore markets, which contribute 51% and 42% to the company’s total revenue, respectively.

CSN’s adjusted EBITDA increased to BRL14.4 billion in the 12 months that ended March 2021 from BRL6.3 billion in 2019, and adjusted leverage declined to 2.4x from 4.8x on positive industry momentum. We expect CSN’s adjusted leverage ratios to decline to around 1x-2x over the next 12-18 months and to be within the 3.0x-4.5x range over time based on a range of price scenarios for iron ore 62% Fe of $70-$100 per ton and normalized steel operations. Net leverage, assuming a recurring BRL10 billion cash position, will fall to below 1x in 2021 and settle around 2-3x over time. Leverage ratios could strengthen depending on how much debt reduction the company pursues this year.

CSN’s credit quality and liquidity have improved materially since late 2020 amid a robust increase in cash and cash flow coming from strong steel and iron ore operations, and several liquidity-enhancing initiatives carried out by the company. These include the IPO of its mining subsidiary, the around BRL4 billion reduction in gross debt so far this year, the sale of about half of its preferred shares in Usiminas for BRL1.3 billion, the issuance of $850 million in new 10-year notes to tender the $925 million notes maturing in 2023, and the ongoing refinance of BRL3.4 billion in debt with Banco do Brasil S.A. and Caixa Economica Federal that come due in 2021-22.

Still, CSN’s track record of aggressive financial policies, including a highly leveraged capital structure, appetite for growth and dividend requirements to service debt payments at the parent level are key risks. However, we acknowledge that CSN is proving to be more conservative in its financial management and in preserving its credit quality even while pursing opportunistic acquisitions.

The acquisition will also help to consolidate Brazil’s fragmented cement market, improving the competitive landscape by rationalizing competition. Brazil has an annual installed cement production capacity of about 102 million tons, and had an annual consumption of 60 million tons in 2020. That is an improvement from the 2018 trough of 53 million tons, but still below the 2014 peak of 73 million tons peak. The sector has struggled with sequential contractions in cement demand since 2014, which led domestic cement prices to drop to a low of BRL25 per 50 kilogram bag in 2017-19, from nearly BRL35 in 2011.

Cement demand in Brazil was hard hit by lower residential construction derived from the country’s economic recession in 2015-16 and a retrenchment of public and private investments. In 2020, cement demand grew 10.9% from the previous year because of the strong performance of the self-construction segment and a pick-up of real estate construction activity, which together contribute to around 80% of the total cement consumption in Brazil. For 2021, cement demand growth will soften, reflecting less disposable income available for self-construction with the phase out of government support to individuals but still firm residential construction activity.

Credit Outlook: 5 July 2021. Pg. 8
Moodys

Brazil, March 24, 2021 – Carrefour S.A. (Baa1 negative) announced the acquisition of Brazilian food retailer Grupo Big S.A. for an enterprise value of around €1.1 billion, equivalent to an estimated 8x enterprise value/EBITDA multiple before synergies. The transaction is expected to close in 2022 following regulatory approval from the Brazilian authorities. Overall, we view the acquisition as credit positive for Carrefour because it will be funded by cash, reducing gross leverage once synergies are achieved, and strengthen its leading position in Brazil.

The acquisition will improve Carrefour’s business profile by increasing its overall scale and geographical diversification, in addition to strengthening its position in Brazil. Carrefour and Grupo BIG are the country’s largest and third-largest food retailers, respectively, and have complementary geographical coverage: Grupo BIG has a strong presence in the north-east and south of Brazil, where Carrefour currently has limited penetration. In addition, the similarity of Grupo BIG’s formats with Carrefour’s (mainly cash and carry and hypermarkets) will facilitate the companies’ integration.

Carrefour will finance the transaction through a mix of cash (70%) and equity (30%) and we expect it to have sufficient cash on balance sheet to fund the acquisition. As a result, Moody’s adjusted debt/EBITDA will decrease by around 0.2x pro forma for the transaction and taking into account around €260 million of run-rate EBITDA synergies that it expects to achieve over a three-year period. However, net debt will deteriorate slightly once the transaction completes because of the estimated €800 million acquisition cost. We also expect restructuring costs to partially offset the additional cash flow from Grupo BIG in the years following the transaction’s closing.

Credit Outlook: 29 March 2021. Pg. 4
Moodys

Colombia, January 27, 2021 – Ecopetrol S.A. (Ecopetrol, Baa3 stable) announced the acquisition of 51.4% of the capital of Interconexion Electrica S.A. E.S.P. (ISA, Baa2 stable). ISA is a publicly traded power company owned by the Government of Colombia (Baa2 negative). The transaction is credit positive for Ecopetrol because ISA generates a more stable EBITDA compared to that of Ecopetrol’s oil and gas commodity business, which increases cash flow visibility for Ecopetrol. Also, ISA operates in Colombia, Brazil, Peru and Chile, which reduces Ecopetrol’s geographic concentration risk; and Ecopetrol’s capital structure will not materially change after the completion of the acquisition transaction.

The acquisition of the controlling stake at ISA may cost approximately $4 billion. Because ISA is publicly traded, the acquisition amount should be based on market prices and on standard valuation practices, despite the Colombian government currently controlling Ecopetrol’s and ISA’s capital.

Ecopetrol’s plans to sell shares and assets as well as raise debt to fund the acquisition of ISA. The company expects that the combination of such initiatives will not deteriorate its credit metrics materially. We estimate that Ecopetrol’s debt/EBITDA ratio was around 3 times at year-end 2020 and that this credit metric will remain relatively stable in the next few years, pro-forma for the consolidation of ISA. Our estimate is based on an average Brent oil price of $45 per barrel (dpb) in 2021 and 50 dpb in the medium term.

We understand that after completion of the transaction, ISA will contribute with 15-20% of Ecopetrol’s consolidated EBITDA. We assume that the companies’ business strategies will not change materially and that their respective management teams, dividend policies and capital investment plans will remain mostly unchanged.

Ecopetrol is the largest integrated oil and gas company in Colombia. Ecopetrol has three business segments, namely exploration and production, refining activities and transportation and logistics. Its production averaged around 639,000 barrels of oil equivalent per day, net of royalties, in the 12 months that ended September 2020, and total assets amounted to $43 billion in September 2020. The Colombian government owns 88.5% of the company’s capital and the balance has been traded on the Colombian Securities Exchange since November 2007.

ISA, headquartered in Medellin, Colombia, is an operating holding company with businesses in the electricity transmission, toll roads, telecommunications, and systems management sectors. The company holds direct and indirect ownership stakes in a portfolio of subsidiaries located in Colombia, Brazil, Peru and Chile.

Credit Outlook: 1 February 2021. Pg. 5
Moodys

Costa Rica, July 30, 2020 – Liberty Latin America Ltd. (LLA), the parent of VTR Finance N.V. (Ba3 stable), announced a $500 million deal to acquire Telefónica S.A.’s (Baa3 stable) subsidiary Telefónica Costa Rica. LLA intends to include Telefónica Costa Rica in the VTR credit pool, which will also include Cabletica, LLA’s existing fixed-line business in Costa Rica. Pending regulatory approvals, VTR expects the acquisition to close in the first half of 2021. LLA will increase its market share in Costa Rica, and cost synergies will improve the combined group’s EBITDA margin in the next two to three years, credit positives for LLA.

The all-cash transaction implies a $500 million enterprise value for Telefónica Costa Rica on a cash- and debt-free basis, equivalent to a 6.0x EBITDA multiple based on Telefónica Costa Rica’s 2019 EBITDA, including projected annual run-rate synergies. But LLA also intends to finance the acquisition with some borrowing from local lenders and from VTR Finance N.V. The deal’s credit implications for the VTR credit pool will depend in part on how much new debt it takes on for the transaction.

The acquisition of Telefónica Costa Rica and its combination with Cabletica will create an integrated telecom operator that will provide a full suite of fixed and mobile services. Buying Telefónica Costa Rica would give LLA ownership of Costa Rica’s second-largest mobile operator, with a market share of around 24%, on top of its number-two fixed-services operator, with Cabletica’s roughly 20% market share for broadband and 25% for pay TV.

We expect that the combination will also result in cost synergies, improving the combined group’s EBITDA margin during the next two to three years. The synergies that LLA expects to generate will effectively reduce the EBITDA multiple of the purchase price to 6.0x from 7.4x based on 2019 data, or an improvement in the target’s EBITDA to about $80 million, including synergies, from $68 million in 2019.

In addition to borrowings in Costa Rica and at VTR Finance N.V., LLA would finance the remainder using its own liquidity and other sources of capital. Although LLA has not confirmed the exact funding mix, the group said that it is targeting about 4x debt on the acquired asset’s EBITDA including synergies, according to LLA’s calculations, implying about $300 million of incremental debt at VTR.

VTR’s Ba3 rating already reflects the contribution of Cabletica, which LLA anticipated to take place in the first quarter of 2021, and an adjusted gross debt/EBITDA ratio that will decline to close to 4x by the end of 2021 from 4.6x in 2019. Once the funding mix is confirmed and more data become available about Telefónica Costa Rica’s contribution to VTR, we will assess whether the deleveraging trend for VTR remains in line with what we had expected before this acquisition.

Telefónica Costa Rica is Costa Rica’s second largest mobile service provider. As of 30 June 2020, the business had 2.3 million subscribers, and its mobile network currently has approximately 90% LTE population coverage.

Cabletica, which LLA acquired in 2018, is a leading fixed-line operator in Costa Rica, offering broadband, Pay TV and fixed telephony services, with about 600,000 homes passed and 430,000 revenue generating units as of March 2020, and revenue of CRC77 billion ($130 million) in 2019.

VTR provides broadband and wireless communications services in Chile and is a wholly owned subsidiary of LLA. As of March 2020, VTR’s network passed 3.72 million homes and served about 2.97 million fixed revenue generating units. The company also served around 304,900 mobile subscribers as a mobile virtual network operator. The company reported revenue of CLP663 billion (around $800 million) for the 12 months to March 2020.

Credit Outlook: 3 August 2020. Pg. 10
Moodys