Step-up bonds pay one coupon rate for an initial period followed by a higher coupon rate later. Moody's assigned its a B2 rating to the proposed issue, and the outlook is stable. The rating would have been higher, but is capped at Moody's Brazil country ceiling for foreign currency bonds and notes of B2, Moody's said. A sovereign upgrade "could positively impact" Ipiranga's rating, Moody's added.
Because proceeds are being used to pay off the bank loans, the company should be able to take out fresh loans to meet the 2005 put option, Moody's said. Moody's warned that the rating could be negatively affected if CBPI is required to provide cash above expected levels to other companies within the Ipiranga group, or to other entities owned by the controlling shareholder families.
Ipiranga posted adjusted free cash flow of 43mn reais (approximately US$15mn) in 2002, equal to 10% of expected total debt after the proceeds from the note issuance are used to pay down all of the company's short term bank lending, Moody's said.
Moody's said it expects cash flow as a percentage of total debt to average more than 20% during the term of the notes. Ipiranga was unavailable for comment Monday, following the death of the group's main shareholder, Joao Pedro Gouvea Vieira, on Monday. The Gouvea Vieira family, together with the Tellechea, Ormanzabal and Martins Bastos families, controls Ipiranga.
Gouvea Vieira is reported to have been one of the main opponents to the sale of a controlling stake in the Ipiranga group of companies. CBPI is the second largest fuel distribution and marketing company in Brazil, with a 13-14% market share. It has furthermore posted consistent operating margins, and recently modernized its retail outlets so that over half of its 3,510 retail outlets now have the "one-stop" convenience format.
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