St. Mary's Cement Inc.'s Proposed Senior Unsecured Notes Of Up To $500 Million Rated 'BB+' (Recovery Rating: '3')


SAO PAULO (S&P Global Ratings) Jan. 11, 2019--S&P Global Ratings assigned 
today its 'BB+' issue-level rating to St. Mary's Cement Inc.'s proposed senior 
unsecured notes for up to $500 million (subjected to a minimum of $300 
million) due April 5, 2041, at an annual rate of 7.25%. The notes will be 
offered in exchange for Votorantim Cimentos International S.A.'s (VCI: not 
rated) 2041 bonds.We also assigned the recovery rating of '3', indicating our 
expectation of a meaningful recovery on the notes (rounded estimate 65%) under 
a hypothetical default scenario.

The debt rating reflects the credit quality of St. Marys' ultimate parent, 
Votorantim Cimentos S.A. (VCSA; BB+/Stable/--), which will unconditionally 
guarantee the notes. The guarantee ranks pari passu to VCSA's other senior 
unsecured debt.

This transaction is part of VCSA's broader organizational and debt overhaul in 
order to pursue a more efficient capital management. Given its U.S. and 
Canadian subsidiaries' strong cash flows, we already expected a higher debt 
allocation at those entities. St. Mary's new notes will replace part of the 
outstanding $1.15 billion 2041 notes that VCI issued under the same 
conditions. In addition to this exchange offer, VCI is launching a tender 
offer for up to $650 million (with a minimum of $500 million) in aggregate 
principal amount of its notes due 2041, 2022, and 2021, following this 
respective priority level. We expect the proposed tender offer to be funded 
with the proceeds of a new R$2.0 billion capitalization of VCSA from its 
holding company, Votorantim S.A. (BB+/Stable/--), plus cash on hand from VCSA. 
The proceeds from the latter will primarily come from the recent sale of the 
group's stake in its pulp and forestry business. In our view, these actions 
are clear signs of VCSA's importance to the Votorantim group and its 
commitment to support and enhance VCSA's leverage profile.

Recovery Analysis
Key Analytical Factors
St. Mary's senior unsecured notes receive a recovery rating relative to the 
assumed recovery prospects of the bondholders under a hypothetical default 
scenario. VCSA guarantees all notes issued by St. Mary's (the existing notes 
due 2027 and the new ones due 2041) and VCI (due 2021, 2022, and 2041), in 
addition to several bilateral obligations issued by the group's entities 
operating in other countries. Given the exposure to multiple jurisdictions 
where the issuers, guarantor of the debts, and operations are incorporated and 
organized (Luxembourg, Canada, the U.S., Europe, Africa, Brazil, and other 
countries in Latin America), we understand some disputes could arise over 
which jurisdiction's laws should apply for a potential insolvency. Given such 
uncertainty, and considering that currently most of the debt is guaranteed by 
the Brazilian entity (VCSA), which also holds the majority of the group's 
cement capacity, we assume that any recovery procedure would most likely occur 
in the Brazilian jurisdiction.    

As such, we believe that a default could occur after five years of 
persistently worsening economic conditions in Brazil and North America, which 
would pressure the group's revenue and EBITDA, while limiting the company's 
access to capital markets to refinance maturing debt.

In a default scenario, we expect VCSA to reorganize, rather than liquidate, 
because of its leading position in various markets and its high-quality asset 
base. We applied a 5.0x EBITDA multiple (standard approach for the industry) 
to an estimated distressed emergence EBITDA of about R$1.5 billion to derive 
our gross recovery value of around R$7.2 billion. We don't believe VCSA could 
post such a level of EBITDA in the near term, based on the risks the company 
is currently subject to and its geographical diversification. However, under 
our simulated default scenario, persistently weak EBITDA would likely stem 
from further decline in demand for cement, as well as from management's 
strategic missteps.

We then discount 5% of the gross value to account for administrative expenses 
to arrive at a net enterprise value (EV) of R$6.8 billion, which is finally 
distributed among each debt instrument according to the structure of 
guarantees and subordination.
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