Fitch Affirms Amaggi’s FC and LC IDRs at ‘BB’; Outlook Stable

Fitch Ratings has affirmed Andre Maggi Participacoes S.A (Amaggi)’s Long-Term (LT) Foreign Currency (FC) and Local Currency Issuer Default Ratings (IDRs) at ‘BB’ and national LT rating of ‘AA+(bra)’.

Fitch has also affirmed the senior debt rating issued by Amaggi Luxembourg International S.a r.l. at ‘BB’. The Rating Outlook is Stable.

Key Rating Drivers

Integrated Business Profile: Amaggi has a regionally-integrated agribusiness footprint with a leading position in the production, origination and commercialization of grains such as soybeans, corn and cotton from the Mato Grosso state in Brazil. The company is self-sufficient in terms of energy and benefits from its logistic segment, which includes the management of its own hydro-transportation system (Hermasa) and access to other navigation routes, warehouses and terminals through joint ventures or companies where the group has a minority interest.

The group’s competitive advantages include its location, vertical-integration and export-driven business model. Approximately 84% of revenues are generated outside Brazil. Amaggi owns 306 thousand hectares of agricultural land, of which 174,000 hectares are farmable.

Increased Leverage: Amaggi’s RMI net-adjusted leverage is projected to increase to 3.5x in 2021 from 2.8x in 2020, before declining below 3.0x in 2022. The increase in leverage is due to negative FCF resulting from higher capex and working capital needs following the company’s acquisitions of O’Telhar Agropecuaria Ltda; this acquisition increased Amaggi’s production capacity of grains and fibers by approximately 34%. The company’s EBITDA is projected to decline to USD425 million in 2021 from USD463 million in 2020, as increasing profit from its Agro division due to increased hectares farmed and rising commodity prices was not able to offset the weak performance of its commodity division. That latter division suffered from increased transportation cost.

High Working Capital Needs: Amaggi needs to maintain high liquidity levels to offset risks related to foreign exchange and commodity price movements. The company, as well as other agricultural processors, are subject to margin calls on grain they have hedged. Prices for most agricultural commodities can swing upward quickly due to a wide range of unpredictable macro-environmental conditions, and supply and demand imbalances. The timing of the outflow from these transactions may not perfectly match the inflow of cash that results from selling grain at the higher prices. Margin calls amounted to about USD318 million in 2020 due to higher grains prices and grain origination and are expected to be above USD250 million in 2021.

Origination and Counterparty risks: Amaggi faces intense competition from large multinational grain companies such as Archer Daniels Midland Company (ADM), LDC, Cargill and Bunge in the acquisition of grains in Mato Grosso, which is the key state for soy and corn production in Brazil. This risk is mitigated by the group’s capacity to process large volumes thanks to its logistics which enable the company to compete with its peers in terms of market share. Advances in financing to farmers are provided under strict criteria with the use of rural credit notes for collateral. No single producer represents more than 1.6% of Amaggi annual origination. Working capital is seasonal, and part of its grain origination requires some advances to suppliers.

Supply Chain Scrutiny: The agricultural sector in Brazil is under increased scrutiny of its supply chain due to deforestation issues. Amaggi attempts to mitigate this risk through several ESG initiatives related to the tracing of the sourcing of the grain it buys. Nevertheless, the sector is expected to remain under scrutiny and decreased lending to the sector, or bans on grain originating in Brazil, could impact the sector’s capacity to access to capital or financial results.

Derivation Summary

Fitch views Amaggi’s business risk profile as higher than international peers Bunge Limited (BBB/ Stable), Cargill Incorporated (A/Stable), and ADM (A/Stable), due to its smaller operational scale, lower diversification and substantial concentration in one region.

Risks related to the agribusiness industry is similar for most grain processors. It includes exposure to supply and demand imbalances, unpredictable weather patterns, trade-related wars, government policies and intense competition. In comparison to its global peers, Amaggi mitigates some of this risk by owning a lot of land and having an Agro division in which it grows various crops. A weakness of Amaggi relative to global peers is the concentration of its assets in Brazil. This exposes the company to risk related to deforestation within the agribusiness industry, which can include bans on products from certain countries at times.

The company’s operations are concentrated in Matto Grosso, Brazil, which subjects the company to the Brazilian country ceiling of ‘BB’. As most revenues are derived from export markets, Fitch believes that the rating could be maintained should the Brazilian country ceiling be downgraded by no more than one notch. When combined with higher average leverage, these factors result in lower ratings than its peers (Bunge, ADM, Cargill).

Key Assumptions

Fitch’s Key Assumptions Within the Agency’s Rating Case for the Issuer:

EBITDA of about USD425 million;

Relatively stable yoy RMI levels at about USD455 million;

RMI adjusted net leverage of about 3.5x by YE 2021.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Improved scale and geographical diversification;

RMI-adjusted net leverage (RMI-adjusted total net debt to operating EBITDA) below 2.5x range on a sustained basis;

Liquidity ratio (cash and marketable securities + RMI + account receivables/Total short-term liability) above 1.5x on a sustainable basis;

Secured debt/EBITDA below 1.0x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Loss of business diversification;

RMI-adjusted net leverage (RMI-adjusted total net debt to operating EBITDA) sustained above 3.5x range on a sustainable basis;

Liquidity ratio (cash and marketable securities + RMI + account receivables/Total short liabilities) below 0.8x at YE;

Secured debt/EBITDA above 2.5x.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA‘ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: The diversified sources of external liquidity used for short-term working capital financing-combined with cash, short-term marketable securities and high levels of liquid RMI-provide Amaggi with enough financial flexibility.

As of Sept. 31, 2021, Amaggi reported consolidated cash and marketable securities of USD855 million, covering by 1.2x times the USD734 million of short-term debt. Fitch expects the RMI-liquidity ratio to be about 1x at YE 2021. The company also has access to several uncommitted bank lines and maintains a minimum cash policy of USD400 million.

Issuer Profile

Amaggi operates in an integrated and synergistic way throughout the agribusiness chain: agricultural production, river and road transport, port operations, origination, processing and commercialization of grains and inputs, generation and commercialization of electricity.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Amaggi has a score of ‘4’ to Governance Structure and Group Structure due to lack of board independence as the company is privately-controlled and related-party transactions exist. The family’s strong influence upon management and the existence of related-party transactions could result in decisions being made to the detriment of the company’s creditors, which would have a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.

The company has also a score of ‘4’ to Waste & Hazardous Material Management due to the ecological impact related to land use, as a large part of the volume of grain coming from the commodity business come from Amazon and Cerrado Biomes, which has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.