Movida Participações S A : Rating Agency Report - S&P

Research Update:

Brazilian Car Rental Company Movida Outlook

Revised To Positive On Growth Prospects, 'BB-'

Ratings Affirmed

Research Update: Brazilian Car Rental Company Movida Outlook Revised To Positive On Growth Prospects, 'BB-' Ratings Affirmed

sourcing has risen, amid automakers' supply-chain disruptions, allowing Movida to increase its fleet organically. Moreover, we don't assume major changes in competitive conditions in the car rental industry following the merger of Movida's two major competitors, Localiza Rent a Car S.A.

(global scale: BB+/Stable/--; nationals scale: brAAA/Stable/--) and Unidas S.A. (brAAA/Stable/--) next year. Once that occurs, Movida will be the second-largest player in the industry.

Due to these factors, we revised our assessment of the company's busines risk profile to fair from weak. On the other hand, the final rating remains the same, because credit metrics will be somewhat pressured next year mainly due to much higher base interest rates. If Movida expands its scale without weakening credit metrics beyond our expectations or its profitability, we could raise the ratings in the next 12-18 months.

Expected growth despite Brazil's weakening economy in 2022. We expect the car rental industry in Brazil to continue growing despite likely feeble economic growth, uncertainties due to presidential election, and higher interest rate and inflation. We understand that the company can ramp up, because we continue to see stronger rates and demand in the RaC segment, high prices for used cars, and the resilience of Movida's fleet management segment. Moreover, the company has improved its used-carsales unit and that its current scale and its focus on the fleet management segment would allow it to grow even if industry conditions weaken.

Higher interest burden to be offset mainly in 2023. Movida issued more than R$10 billion in debt during 2021, consisting of the notes issuance, and add-onto the existing notes and debentures in the local market. Most of the company's issuances are to fund capital expenditures (capex) in 2022, given potential uncertainties in credit markets. We forecast the company's net debt to jump close to R$6.1 billion in 2021 and R$9 billion - R$10 billion in 2022 from R$2.8 billion in 2020, given higher capex for fleet growth. This, coupled with significantly higher interest rates in Brazil, will increase the company's interest burden significantly, weakening credit metrics in 2022. But we expect the latter to improve starting in 2023, assuming declining interest rates and as the company's expansion gains strength.

Outlook

The positive outlook reflects a one-in-three chance of an upgrade if Movida consolidates its business position in the fleet management segment while its RaC and used-car sale units remain profitable. We expect the company to maintain margins in the 20%-25% range in the future, declining somewhat compared with current levels, but still higher than historical figures, given still profitable used-car sales structure even if vehicle prices return to normal levels. We expect EBIT interest coverage close to 2.0x and FFO to debt of about 20% in the next three years.

Upside scenario

We could raise the ratings in the next 12-18 months if Movida's scale, revenue, and cash flows grow without pressuring credit metrics. In this scenario, we would see FFO to debt of more than 20% and EBIT interest coverage close to 2.0x. Additionally, an upgrade would depend on the same rating action on its parent company, Simpar S.A., and on solid liquidity position that would allow Movida to withstand a hypothetical sovereign default scenario of Brazil (BB-/Stable/B).

Research Update: Brazilian Car Rental Company Movida Outlook Revised To Positive On Growth Prospects, 'BB-' Ratings Affirmed

Downside scenario

We could revise the outlook to stable if the company's growth pace doesn't materialize due to lower-than-expected demand for the RaC and fleet management segments, along with lower activity in used-car sales. In this scenario, we would see weaker cash flows, resulting in EBIT interest coverage below 1.7x and FFO to debt closer to 15%.

Our Base-Case Scenario

• Brazil's GDP growth of 4.8% in 2021, 0.8% in 2022. and 2.0% in 2023, influencing overall demand and pricing power in fleet management business.
• Brazil's average inflation of about 8.2% in 2021, 7.7% in 2022, and 4.0% in 2023, affecting labor-related and fleet-maintenance prices.
• Average short-term policy rates of 5.6% in 2021, 10.3% in 2022, and 9.6% in 2023, compared with 2.4% at the end of 2020, affecting funding costs and rates of new fleet management contracts.
• Total consolidated fleet at year-end of about 170,000 cars in 2021, 190,000 in 2022, and 210,00 in 2023. We consider that the company will continue allocating 55%-60% of its vehicles to the fleet management segment and 40%-45% to the RaC unit in 2022, but to increase consistently to 60% and 40%, respectively, starting in 2023.
• Average capacity utilization rate in the RaC business of about 90% in the next few years.
• Fleet management rates to increases about 5% in 2021, 8% in 2022, close to 20% in 2023, and continue increasing afterwards, as the company is expanding its fleet, impacting pricing of renewal contracts.
• Average RaC daily rates growing 15% in 2021, above 30% in 2022, and close to 20% in 2023, reflecting the strong demand in the sector, but also a more premium vehicle mix.
• Net capex of about R$5.2 billion in 2021, R$5.3 billion in 2022, and R$4.2 billion in 2023 to support fleet expansion.
• Used-carsale revenue of about R$2.6 billion in 2021, close to R$5 billion in 2022, and R$8 billion in 2023.
• Dividend distribution of 25% of the previous years' net income in the next few years.

Based on these assumptions, we arrive at the following credit metrics:

• Net revenue of R$5.4 billion in 2021, R$9.7 billion in 2022, and R$14.2 billion in 2023, compared with about R$4.1 billion in 2020.
• Adjusted EBIT of close to R$2 billion in 2021, R$3 billion in 2022, and R$3.2 billion in 2023, compared with close to R$540 million in 2020.
• FFO of close to R$1.3 billion in 2021, R$1.6 billion in 2022, and R$2.5 billion in 2023, compared with about R$646 million in 2020.
• EBIT interest coverage of 2.7x in 2021, and 1.7x-2.1x in 2022 and 2023, compared with 2.6x in 2020.
• FFO to net debt of close to 22% in 2021, 15%-18% in 2022 and 19%-22% in 2023, compared

Research Update: Brazilian Car Rental Company Movida Outlook Revised To Positive On Growth Prospects, 'BB-' Ratings Affirmed

with about 22.6% in 2020.

Ratings Score Snapshot

Issuer credit rating:

• Global Scale: BB-/Positive/--
• National Scale: brAA+/Positive/--

Business risk Profile: Fair

• Country risk: Moderately high
• Industry risk: Intermediate
• Competitive position: Fair

Financial risk Profile: Significant

- Cash flow/Leverage: Significant

Anchor: bb-

Modifiers

• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Liquidity: Adequate (no impact)
• Financial policy: Neutral (no impact)
• Management and governance: Fair (no impact)
• Comparable rating analysis: Negative (-1 notch)

Stand-alone credit profile: bb-

ESG Credit Indicators: E-2S-2G-3

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• General Criteria: Methodology For National And Regional Scale Credit Ratings, June 25, 2018
• Criteria | Corporates | Industrials: Key Credit Factors For The Operating Leasing Industry, Dec. 14, 2016
• Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
• Criteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016

Research Update: Brazilian Car Rental Company Movida Outlook Revised To Positive On Growth Prospects, 'BB-' Ratings Affirmed

• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Ratings List

Ratings Affirmed; CreditWatch/Outlook Action

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.