Fitch: ratings unchanged for Votorantim

According to Fitch Ratings, the recent decision by Brazil's antitrust agency, CADE, to stiffen the penalties against Brazilian cement companies allegedly engaged in price collusion presents a significant challenge to Votorantim Cimentos (VCSA), but it will not result in a negative action to its 'BBB' rating.

VCSA's Rating Outlook was affirmed by Fitch at Negative on April 8, 2014. This rating action took into consideration the possibility of a negative ruling by CADE. All six of the cement companies involved in the trial were found guilty and VCSA has announced its intent to appeal the ruling. The company will most likely be forced to post guarantees during the appeal process, which is expected to extend beyond 2014. CADE's proposed recommendations include several provisions which would negatively impact VCSA, including a fine of BRL1.5bn and the forced sale of certain assets.

The fine would adversely affect VCSA's liquidity and hamper its ability to deleverage as expected. In the event that VCSA has to pay the fine during 2014, Fitch projects pro forma net leverage could range from 3.2x-3.5x instead of the previously estimated net leverage ratio of 2.8x at 31 December 2014. In addition, CADE included an imposed restriction on VCSA's access to public financing. While VCSA has strong capital markets access in both Brazil and abroad, the restriction could potentially increase the company's cost of debt financing.

CADE's sanctions against VCSA also include a mandatory divestiture of its minority stake in its cement and concrete companies, the sale of up to 20% of its ready-mix assets in areas where the company has more than one plant within a 50km radius, and the sale of a strategic cement asset.

The potential cement asset sale is not quantifiable at this point. Fitch believes the potential asset sales are only mildly negative as VCSA would be receiving cash for the assets. The up to 20 per cent sale of VCSA's ready-mix assets is immaterial as the segment only accounts for a very small percentage of the company's consolidated EBITDA. An asset sale should also not materially impact VCSA's operations given the company's 31.7Mt of installed production capacity in Brazil as of 31 December 2013. The decision did not include the required sale of 35 per cent of VCSA's cement capacity, which had been previously included in the sanctions.