Fitch Ratings has affirmed InterCement Participacoes S.A. (InterCement) and InterCement Brasil S.A's Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) at 'C'.

Fitch has also affirmed the National Long-Term Credit Rating at 'C(bra)', and the 2024 notes issued by InterCement Financial Operations BV at 'C'/'RR4'.

The ratings reflect InterCement's 'standstill status' while continuing to negotiate its debt-restructuring plan. The company has already announced that it has hired a financial advisor to evaluate strategic alternatives, such as private placement, merger, or partnership with a strategic player, or even a potential full divestment. At this time, Fitch has limited visibility of InterCement's future performance - given the uncertainties around the final asset-sale structure and the remaining operating cash flow basis.

Key Rating Drivers

Standstill Status: InterCement has announced two renewals of its standstill agreement with local debentures holders since 2Q23, with the current maturity at May 2024. As of Sep. 30 2023, its local debentures were USD893 million, out of a total debt of USD1.8 billion, per Fitch's calculations. The debentures have the shares of Loma Negra C.I.A.S.A (Loma Negra), its 51% owned Argentinean subsidiary, as collateral. The debentures are due in 2027 but hold the option to anticipate a maturity to May 2024, before its unsecured bonds (USD549 million) due July 2024, if the latter is not refinanced.

Challenge to Complete Refinancing: InterCement has tried to find alternatives to boost its holding and Brazilian capital structures over the last few years. It raised USD272 million with an asset sale (14% total debt) in 2023 (USD232 million during December), and this is likely be used to prepay debt. As of Sep. 30 2023, InterCement had USD158 million of cash and USD1 billion as short-term debt, including USD549 million of the unsecured notes, USD194 million of local debentures, and USD73 million of senior notes in Argentina).

Shrinking Portfolio: InterCement completed three non-core asset sales in different geographies during 2023, closing the year with operations only in Brazil and Argentina. The company sold its operations in Egypt, Mozambique and South Africa. The Brazilian and Argentine operations represented around 35% and 53%, respectively, of consolidated adjusted EBITDA (USD476 million) in 2022, and the other three countries contributed 11% (USD52 million).

Despite highly volatile macroeconomic scenarios and currency-control restrictions in Argentina, InterCement was able to benefit from Loma Negra's strong operating cash flow generation and unleveraged capital structure. Loma Negra distributed around USD246 million of dividends during 2022 and 2023. The subsidiary generates on average around 55% of InterCement's consolidated adjusted EBITDA but holds only 13% of the net debt.

Unsustainable Capital Structure: On a proforma basis, incorporating the asset sale of South Africa and Mozambique, InterCement's net debt to adjusted EBITDA would be approximately 9.1x (excluding Loma Negra), per Fitch's calculations. On a proportional basis, excluding the 49% of Loma Negra that InterCement does not own, leverage stood at 4.8x as of LTM Sep 30 2023, per Fitch's calculations. These levels show a deterioration from the past two years, with an average of 3.9x in 2021 and 4.4x in 2022, respectively. On consolidated basis, InterCement proforma leverage was 5.7x in Sep 30 2023, 3.8x in 2022 and 3.0x in 2021.

Derivation Summary

InterCement's rating reflects its standstill status, pending negotiations for a full debt restructuring with creditors.

Key Assumptions

Brazilian and Argentinian volumes to have declined marginally in 2023.

Capex levels around USD125 million in 2023.

Dividends to minorities and preferred shareholders of around USD65 million in 2023.

KEY RECOVERY RATING ASSUMPTIONS

Going-Concern (GC) Approach

The GC EBITDA estimate reflects Fitch's view of a sustainable post-reorganization EBITDA, excluding Loma Negra and allowing InterCement to cover maintenance capex and interest. The enterprise value (EV)/EBITDA multiple applied is 5.0x, reflecting InterCement's a mid-cycle multiple, considering its strong market share in Brazil and Argentina.

Fitch applies a waterfall analysis to the post-default EV based on the relative claims of the debt in the capital structure. The debt waterfall assumptions consider the company's proforma total debt. These assumptions result in a recovery rate for the unsecured bonds within the 'RR2' range, but due to the soft cap of Brazil at 'RR4', InterCement's senior unsecured are rated at 'C'/'RR4'.

RATING SENSITIVITIES

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

Proactive steps by the company to bolster its capital structure significantly, including asset sales, allowing a smooth refinancing of its capital-market debt without a material reduction in terms.

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

An uncured payment default on any material financial obligation would lead to a downgrade of the IDRs to 'RD'.

The completion of a proposed exchange offer would lead to a downgrade of the Long-Term IDRs to 'RD'. The IDRs would be subsequently upgraded to a rating level reflecting the post-distressed debt exchange (DDE) credit profile.

Liquidity and Debt Structure

High Refinancing Risks: As of Sep. 30 2023, InterCement had USD158 million of cash and USD1 billion as short-term debt, including USD549 million of unsecured notes, USD194 million of local debentures and USD73 million of senior notes in Argentina. Remaining debt maturities includes USD116 million due 4Q24, USD305 million in 2025, USD288 million in 2026 and USD117 million in 2027.

Issuer Profile

InterCement is a large cement producer with 15 million tons of total consolidated cement sales during 2022 and annual production capacity of 19 million tons, considering only its currently operations in Brazil and Argentina.

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

InterCement has an ESG Relevance Score of '4' for Governance Structure due to limited board independence through ownership by key shareholder Mover Participacoes S.A. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores

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