Moody’s cuts Cosan’s overseas risk rating to negative from stable

In New York state, Moody’s Investors Service downgraded the ratings of the notes issued by Cosan Overseas Limited and Cosan Luxembourg S.A and guaranteed by Cosan to Ba3 from Ba2. At the same time, Moody’s América Latina has today affirmed Cosan S.A. Indústria e Comércio (“Cosan”)’s Ba2 (global scale) and A1.br (national scale) corporate family ratings. The outlook was revised to negative from stable, since the company’s corporate family rating directly derives from the ratings of its subsidiaries Raizen (Ba1 negative) and Comgás (Ba2 negative), both of which are constrained by the Brazil sovereign bond ratings (Ba2 negative).

Cosan’s Ba2 corporate family rating reflects the group’s aggregate credit risk, and is supported by the company’s diversified portfolio of businesses, including the entire sugar-ethanol chain, fuel and gas distribution, lubes and land management in Brazil, and its adequate liquidity profile. The company’s diversification, especially towards resilient businesses such as the fuel and gas distribution, translates into a stable cash source over the long-term. Moreover, we expect Raízen and Comgás to distribute a significant amount of dividends over the next several years, which will be the primarily liquidity source to service Cosan’s obligations.

Constraining the ratings is Cosan’s aggressive financial policy with an acquisitive growth history and likely high dividends upstream to Cosan Limited — although the company is expected to generate enough cash to fund those dividends and reduce leverage. Although this acquisitive history translated into diversification, it also pressured leverage ratios. Moreover, even though Cosan no longer proportionally consolidates its stake in Raízen, we continue to incorporate Raízen’s strengths, including its strong cash generation, and risks, such as the exposure to the underlying volatility of the sugar-ethanol business, in Cosan’s ratings.

The downgrade of the ratings of Cosan’s senior unsecured notes to Ba3 reflects the recent downgrades of Raízen to Ba1 from Baa3 and Comgás to Ba2 from Baa3, both with a negative outlook. The bulk of Cosan’s cash generation come from dividends from Raízen and Comgás and, consequently, we see the debt at Cosan S.A. level as structured subordinated to the debt at the operating companies. The downgrades of Raízen and Comgás followed the action that downgraded Brazil’s government bond rating to Ba2 from Baa3. Although we believe a significant portion of Cosan’s cash flows, represented by Raízen Combustíveis and Comgás, is more resilient than the overall economy in Brazil, these entities are not fully insulated from the deterioration in the domestic environment.

The negative outlook on Cosan’s ratings mirrors the negative outlook on its two main subsidiaries, Raízen and Comgás.

A downgrade of Cosan’s ratings could result from further negative rating actions on Comgás or Raízen or if liquidity deteriorates. In addition, the ratings could be downgraded if total adjusted debt to EBITDA is sustained above 4.0x.

Although unlikely in the near term, Cosan’s ratings could be upgraded if the company is able to reduce leverage to levels below 3.2x while maintaining an adequate liquidity profile. An upgrade of Raízen or Comgás ratings would also put positive pressure on Cosan’s ratings. (All pro-forma ratios including Raizen figures).