Fitch Affirms JSL's IDRs at 'BB'; Outlook Revised to Negative

Fitch Ratings has affirmed JSL S.A.'s ratings as follows:

--Foreign and local currency Issuer Default Rating (IDR) at 'BB';

--National scale rating at 'A+(bra)';

--Unsecured debentures issuances at 'A(bra)'.

The Rating Outlook for the Corporate Ratings has been revised to Negative from Stable.

The Negative Outlook reflects Fitch's concern over JSL's willingness/ability to deleverage within the next 18 to 24 months, given its ongoing aggressive growth strategy. The two new segments combined, car rental and leasing, should further boost capex volumes, pressuring free cash flow generation and delaying the company's deleveraging trend, in accordance with Fitch calculations. In Fitch's view, the company's aggressive growth strategy for the rental car business might add greater business volatilities in JSL's results, not observed in the past. The rent car business is more intensive in capital and is more exposed to fiercer competion, and to the macroeconomics scenario than the company's other business. JSL's rating headroom is low, with Fitch revised net leverage ratios, measured by Net Debt/EBITDA, expected to be around 4.3x in 2014 and 2015 which is higher than previously anticipated by the agency, at around 3.8x-3.5x.

KEY RATING DRIVERS

JSL's ratings continue to reflect its strong business profile, supported by a leading position in the Brazilian logistics industry and diversified service portfolio, and its resilient operating performance over the last years, despite sluggish economic growth. JSL's aggressive growth strategy has resulted in increasing leverage trend.

JSL's above-average ability to generate free cash flow through capex postponement gives it an important financial flexibility and is embedded in the current ratings. Nevertheless, the company has so far decided to take advantages of market growth within its business activities and is expected to continue to invest heavily over the next years. The company's commitment to an adequate liquidity position vis-a-vis its short-term obligations is a key consideration for the ratings. The rating for the debentures is one notch below the corporate rating due to their structural subordination in relation to most of JSL's debt, which is secured by the company's fleet.

Prominent Market Position and Diversified Portfolio

JSL has a leading position in the Brazilian logistics industry with a diversified portfolio of services with relevant presence in multiple sectors of the economy. The company's services include: supply chain management (35% of its net revenue), fleet management and outsourcing (18%), vehicle dealerships (23%), passenger transportation (8%), general cargo transportation (5%) and car rental (2%). The lately, car rental business (Movida brand), is expected to represent around 15% of total revenues in 2016, per Fitch forecasts. JSL's strong market position, coupled with long-term contracts for most of its revenues (53%), minimizes its exposure to the more volatile economic conditions. The company's significant operating scale has made it an important purchaser of light vehicles and trucks, giving it a significant amount of bargaining power versus other competitors in the industry.

Strong Organic Growth in Business and Increasing Cash Flow

JSL's expansion over the past few years was mainly based on organic growth, as a result of new services and clients, which has demanded additional fleet volumes. At end of 2013, JSL acquired Movida Car Rental Ltda. (Movida) for BRL17.1 million plus the assumption of BRL45.3 million of new debt. By the time, Movida had a small fleet of vehicle (2,400), but during 2014 JSL expanded the fleet to 11,700 as of September 2014 and it should reach around 15,000 by the end of 2014.

JSL has been efficiently managed its business profitability despite strong growth, with its EBITDA margin has been resilient at around 15% over the last three years. Between 2010 and the latest 12 months (LTM) ended Sept. 30, 2014, JSL's net revenue increased by 166%, to BRL5.4 billion. During the same period, the company's EBITDA grew to BRL809 million from BRL330 million while its cash flow from operations (CFFO) rose to BRL672 million from BRL725 million and BRL408 million during 2012 and 2011, respectively. During 2014, JSL's CFFO was pressured by higher working capital requirements of BRL379 million that mostly reflects a non-recurring BRL190 million of a renewal contract related to sales term (fleet management with car sale) and the ongoing restructuring of Movida's operations.

High Capex Leads to Negative Free Cash Flow

During the LTM ended Sept. 30, 2014, JSL reported a negative free cash flow (FCF) of BRL445 million, mainly as a result of BRL1.1 billion of capital expenditures. As the company continues to invest heavily in the business growth, FCF is expected to remain negative by about BRL430 million during 2015. During 2013, FCF was negative by BRL296 million, while in 2012 it was negative by BRL213 million. JSL has the flexibility to improve its FCF generation by lowering its capex expenditures in the event of declining operating cash flow, as most of its capital investments are geared toward increasing the size of its fleet/equipment. Excluding capex related to expansion, JSL generated BRL699 million of positive FCF during Sept. 30, 2014 (LTM), an increase from BRL444 million in 2012 and BRL170 million in 2011.

Leverage to Remain High

Greater working capital requirements and continued strong growth have pressured JSL's leverage ratios during 2014. JSL's leverage, as measured by total debt/EBITDA was 5.2x as of Sept. 30, 2014 (LTM), while its net debt/EBITDA ratio was 4.5x in the same period. Fitch does not expect a material reduction in JSL's leverage ratios in the near term with net leverage expected to be around 4,3x in 2014 and 2015. JSL's leverage relative to its fleet market value is adequate. At the end of the third quarter of 2014, the company reported a fleet market value of approximately BRL3.9 billion, which is similar to its net debt position. The company's flexibility is limited; however, as only about 59% of its fleet is not used as liens for loans.

Adequate Liquidity

JSL adequate liquidity position vis-a-vis its short-term debt obligations is a key credit consideration. As of Sept. 30, 2014, JSL reported total debt of BRL4.2 billion, of which BRL776 million was classified as short-term. This level of near-term debt compares with BRL526 million of cash and marketable securities and BRL300 million of undrawn stand-by credit facilities due in 2018. The ratio of short-term debt coverage, as measured by cash plus cash flow from operations (CFFO) to short-term debt, is solid, at a ratio of 2.0x. About 40% of JSL's debt is secured. The company's debt profile is mainly composed by banking credit lines (27%), FINAME operations (35%), debentures (28%), and leasing operations (6%).

RATING SENSITIVITIES

Inability to reduce net leverage to below 4.0x on a sustainable basis, associated with adequate liquidity position should lead to a downgrade. The ratings could be pressured by relevant acquisitions that further pressures JSL's capital structure; by a significant reduction in the market value of its fleet, or by a deteriorating macroeconomic environment.

Given the currently high leverage and the company's ongoing growth strategy, an upgrade is unlikely in the medium term. JSL's ability to reduce its secured debt to around 30% may lead the insecured issuances to be in the same level of the company's IDR.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=936095

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