This report does not constitute a rating action.
During the past several years, Brazilian conglomerate Cosan S.A. (BB/Stable/--) and its joint venture subsidiary Raízen S.A. (BBB/Negative/--; brAAA/Stable/--) have invested significantly to expand their operations. However, the macroeconomic environment in Brazil and business conditions for both companies' diverse segments have worsened. Significantly high and still rising interest rates weigh on both companies' leverage, and each is implementing measures to contain debt. There have been changes in top management across all Cosan's subsidiaries. Cosan's leverage likely peaked in 2022, while we expect that of Raízen to peak in December 2024 and March 2025.
We have recently revised the outlook on Raízen to negative (Raizen S.A. Global Rating Outlook Revised To Negative From Stable On High Leverage; 'BBB' Ratings Affirmed, Jan. 30, 2025), while the rating on Cosan remains at BB/Stable/--. Here, we present frequently asked questions from investors about these companies’ credit quality implications and ratings trends.
Frequently Asked Questions
What triggered the outlook revision on Raízen and what can cause a downgrade?
Raízen's nominal debt reached a record-high level of R$49.8 billion as of Sept. 30, 2024, from R$35.6 billion on March 31, 2024, because of new issuances to support sizable capital expenditure (capex) and working capital requirements, the impact of increasing interest rates in Brazil and related cost of debt, the Brazilian real's depreciation increasing the dollar-denominated debt. In addition, while we believe part of inventory sales will increase cash generation in the last 6 months of fiscal 2025 that ends in March 2025, the company continues to reduce exposure to alternative sources of funding, which will weigh on operational cash generation. We estimate the latter to be only R$1.4 billion and leverage at 3.0x-3.5x by the end of March 2025.
Further negative actions could occur if Raízen is unable to reduce its leverage during the 2025-2026 harvest, and debt to EBITDA would remain consistently close to or above 3.0x, or if it faces liquidity pressures. In our view, the latter could result from weaker operating conditions or difficulties to convert EBITDA into cash generation due to high interest burden and capex and poor working capital management.
What is the potential path to deleveraging?
Raízen has publicly expressed its intention to reduce leverage. The company announced in the past few months several changes to its management, including placing Nelson Gomes (former CEO of Cosan) and Rafael Bergman (former CFO of Rumo S.A.), as the new CEO and CFO, respectively, of Raízen. Raízen has adopted, and we expect it to announce new, counter-cyclical measures. The company sold some non-core assets, such as energy distribution assets and sugarcane from its inefficient plants, reduced its capex by about R$2 billion especially by decelerating E2G projects, if compared to fiscal 2024 levels, and distributed dividends of only R$67 million this fiscal year, down from R$1.5 billion – R$2.5 billion per year historically. We believe further capex cuts and asset sales could relieve debt and credit metrics, but timing, amounts, and operating cash flow reduction are uncertain.
Nevertheless, initiatives for improving productivity, increasing synergies among its core businesses, and a stricter approach to costs and expenses could raise Raízen's EBITDA, mainly in its sugar and ethanol segment, and improve its consolidated cash generation and metrics. Our base-case scenario assumes leverage returning to 2.5x by the end of fiscal 2026, but the volatility and seasonality of the industries in which Raízen operates can delay its deleveraging.
Which factors support Raízen's credit quality?
Raízen is the largest sugarcane processor in the world and has been investing heavily in reducing its historically high idle capacity (20%-25%) and improving productivity, although it took a hit this fiscal year due to severe weather conditions. The company has also invested in second-generation ethanol, with four plants already completed and additional two currently under construction. Raízen is one of the three largest fuel distributors in Brazil, with leading operations also in Argentina and Paraguay. The company's plan on widening its network of fuel stations and the contracted customer base, in addition to focusing on higher value-added products, should contribute to solid margins in its fuel distribution segment, comparable to those of its closest peers. Also, despite currently weaker metrics, Raízen has a track record of conservative debt levels with leverage at about or below 2.0x, which gives us comfort that it will pursue to return to its historical financial targets. Liquidity, although tighter that in the past, continues to be a key strength, as the company takes advantage of its high standing in global and domestic capital markets to issue long-term debt to strengthen its cash position and extend its maturities. As of September 2024, Raízen's weighted average maturity was more than four years.
What's the relationship between Raízen and its controlling shareholders?
Raízen is a joint venture controlled by Shell PLC (A+/Stable/A-1) and Cosan, each of which holds a 44% stake since the company's IPO in 2021. Raízen is managed under an extensive shareholders' agreement, which ensures that both shareholders have equal weight in the company's strategic matters, with each entity appointing three out of total of eight of Raízen's board members. We believe both companies have maintained a conservative approach toward Raízen, in terms of dividends, minimum cash policy, and other aspects. Historically, Raízen has maintained high dividend payouts to its shareholders, but it has also controlled leverage and kept a solid cash position. For example, in fiscal 2021, the company slashed dividends to only R$48 million from R$2.6 billion in the previous fiscal year. Given these factors, we expect both shareholders will continue to back Raízen's strategy of reducing leverage through lower dividends and other cash outflows. We currently assume no dividend payments for the next several years. Finally, we do not consider any potential extraordinary support to Raízen from Shell or Cosan, through additional capital injections. Although we consider Shell has the financial flexibility to do so given its lighter balance sheet, Cosan's ability is more limited, as it focuses on its own deleveraging.
Does Raízen's underperformance weaken Cosan's credit quality?
Not at this point. But if Raízen's dividend flow to Cosan remains constrained for a prolonged period and/or other subsidiaries face setbacks that lead to lower dividends, we could see tightening liquidity at the holding level, potentially leading to a downgrade. Raízen paid R$684 million in dividends to Cosan in fiscal 2024, net of preferred shares (mostly in January-March 2024), down from almost R$1.2 billion in fiscal 2023 and R$1.5 billion in fiscal 2022. In line with our recently updated forecast for Raízen, we now assume no dividends from it to Cosan in the next two years.
Will dividends from Cosan's other subsidiaries offset the deficit from Raízen?
Our expectation is that Compass Gás & Energia and Moove Lubricants Holdings will maintain solid dividends to Cosan in 2025, which together with the proceeds of the sale of its stake in Vale S.A. (BBB-/Stable/--; brAAA/Stable/--) should be enough to offset almost no dividend inflows from Raízen and Vale. Cosan received a total of R$2.7 billion in dividends in 2023 from all its subsidiaries, net of preferred shareholders distribution, and approximately R$3.6 billion in 2024. We estimate Cosan will receive about R$2.0 billion in dividends in 2025, of which around R$1.2 billion will be from Compass, R$500 million from Moove, while the remainder from Radar, Rumo S.A. (BB/Stable/B), and approximately R$90 million from Vale (related to its fourth-quarter results).
Assuming Cosan will use the full amount of R$9.1 billion in proceeds from the sale of its share in Vale to reduce debt, and Brazil's average basic interest rate of 12%-15%, we now estimate it will face approximately R$2.0 billion in interest expenses this fiscal year, down from about R$2.5 billion in fiscal 2024. Although cash inflows and outflows will likely be similar this year, we don't expect liquidity pressures as we estimate Cosan's cash position close to R$3.0 billion at the end of 2024. Moreover, Cosan may consider the sale of assets or reduce its current stake in some of its subsidiaries, if needed to further reduce debt. Last year, Moove filed for an IPO on the New York Stock Exchange that ultimately didn't go through, but we understand this would be an important cash source to Cosan, if it materializes.
Why do you believe Cosan's leverage is on a declining trend?
Cosan's leverage peaked at 4.9x at the end of 2022, following the acquisition of a 4.9% minority stake in Vale through a large and complex transaction of nearly R$21.7 billion, consisting of preferred shares and derivatives. Since then, with dividend inflow from Vale and Cosan's subsidiaries, its leverage metrics have improved due to higher consolidated adjusted EBITDA. S&P Global-adjusted debt to EBITDA decreased to 3.7x in 2023, and we estimate it to slip to about 3.5x by the end of 2024.
In line with its recent focus on deleveraging, Cosan announced the sale of its minority stake in Vale for approximately R$9.1 billion, after trimming its share in the company in recent months. In our view, the proceeds will provide cushion to Cosan's capital structure and ratings amid higher domestic interest rates and lower consolidated dividends from subsidiaries. We expect Cosan to use most of the sale proceeds to pay down debt throughout 2025. In addition, Cosan announced tender offers of its 2027 senior notes ($392 million) and its 2029, 2030, and 2031 senior notes (totaling $900 million), and the repurchase of its third debentures of R$750 million maturing in 2028.
How S&P rating on Cosan incorporates the preferred shares' structure created to fund Vale's acquisition?
The preferred shares' structure created at one layer above Cosan's stake in Raízen and Compass to finance Vale's minority stake acquisition remains in place, and we add it to Cosan's financial debt. The company's reported debt totaled R$24.2 billion as of Sept. 30, 2024, and we add R$8.4 billion of the preferred shares to our adjusted metrics. However, we recognize that they are more flexible than market debt, with no specific maturity date or required amortization and interest payments. Cosan will only be allowed to unravel the structure after 2026 due to a lock-up agreement.
Related Research
- Raizen S.A. Global Rating Outlook Revised To Negative From Stable On High Leverage; 'BBB' Ratings Affirmed, Jan. 30, 2025
- Cosan S.A.'s Sale Of Its Stake In Vale S.A. Will Ease The Pressure On Its Credit Metrics, Jan. 16, 2025
| Primary Contacts: | Matheus H Cortes, Sao Paulo 55-11-3818-4129; matheus.cortes@spglobal.com |
| Fabiana Gobbi, Sao Paulo 55-11-3039-9733; fabiana.gobbi@spglobal.com | |
| Secondary Contacts: | Flavia M Bedran, Sao Paulo 55-11-3039-9758; flavia.bedran@spglobal.com |
| Luisa Vilhena, Sao Paulo 55-11-3039-9727; luisa.vilhena@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.