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Floods Could Amplify Logistics And Inflationary Strains On Some Brazilian Corporate Sectors

The natural disaster already caused 116 deaths, injured 756 people, and there are at least 143 people missing. The floods resulted in interruptions in power supply, logistics, and access to healthcare services. The extent of damage to critical infrastructure, productive assets, and civil buildings isn't fully known so far. We put the ratings on state-owned Banrisul ("Banco do Estado do Rio Grande do Sul S.A. Ratings On CreditWatch Negative On Uncertain Impact From Floods On The Bank") on CreditWatch negative, as the government rescue and insurance costs could weaken the bank's credit quality.

The natural catastrophe will likely have severe fiscal implications of the state of Rio Grande do Sul (not rated by S&P Global). Brazil's central government will contribute to emergency relief efforts, exacerbating pressures on its capacity to balance its primary fiscal results. Moreover, the floods will likely have a marginal to moderate impact on Brazil's inflation and economic growth in 2024.

The heat map below indicates the sectors that operate in the state of Rio Grande do Sul and the floods' potential impact. The high, modest, or neutral expected impacts don't necessarily correlate to ratings impact, as the credit quality change would depend on several other factors including the size of operations impacted, business diversification, and balance sheet headroom.

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Agribusiness

Rio Grande do Sul is one of the main agricultural areas in Brazil. In the 2022-2023 harvest, the state accounted for 8.4%, 2.8%, and 69.1% of the country's total soybean, corn, and rice production, respectively, according to the National Supply Company. Additionally, Rio Grande do Sul accounted in 2023 for 13.8% of Brazil's poultry (775 million birds slaughtered) and 20.4% of pork (9.3 million heads slaughtered) production, according to the Brazilian Association of Animal Protein. The floods will sharply reduce the agricultural output, but more than 80% of soybean planted in the state was already harvested this year, and there's no sizable winter harvesting in the state as temperatures are colder than in the Center West part of the country. The big question will be potential impacts on the grain planting for the 2024-2025 harvest, which will start in the third quarter of 2024.

The floods have impaired the companies' ability to transport and store grains, animal feed, and final agricultural products. The use of alternative roadways and routes is making transportation costlier, and companies are operating at a lower capacity than prior to the floods. A prolonged shutdown or continuing bottlenecks on railroads, roads, and ports in the region, especially the Port of Rio Grande (the state's largest one), could raise storage costs and cause export restrictions.

We believe the operations of Tres Tentos Agroindustrial S.A. (brAA-/Stable/--) are most vulnerable to the damage stemming from flooding, although operations were not materially impacted at this moment.

Within the state, the company operates two industrial plants--representing 60% of Tres Tentos' crushing capacity--and 55 commercial units. However, only two commercial units were damaged by the floods. Efficiency and volumes could shrink, but overall prices for agribusiness products could also rise due to lower supply, benefiting some companies such as SLC Agrícola S.A. (brAA/Stable/--).

Many poultry and pork growers saw their herds decimated, and some slaughtering processors stopped operations. BRF S.A. (global scale: BB/Stable/--; national scale: brAA+/Stable/--) announced that it stopped slaughtering operations for less than a week at its five plants in the state in order to focus on the safety of its employees, but production was resumed afterward. JBS S.A. (BBB-/Negative/--; brAAA/Stable/--) is also operating Seara's units in the state. The logistics costs for feed and exports can rise, but potentially higher prices could compensate these costs. In addition, BRF and JBS' diversified and large operations will cushion their consolidated figures from the flood-related contractions.

We don't anticipate significant impacts on the sugar and ethanol sector. Unlike some Brazilian states, the state of Rio Grande do Sul is an importer of both commodities, and local demand for them can fluctuate in the next few months. The Brazilian National Agency for Petroleum announced adjustments to the blend of biodiesel and ethanol into diesel and gasoline, respectively, to ensure sufficient supply within the state. This can influence premiums of the anhydrous products over the ethanol, but we believe this should be temporary.

Transportation/Logistics

The railway operator Rumo S.A. (BB/Stable/B; brAAA/Stable/brA-1+) announced a partial stop of its operations in the state. In Rio Grande do Sul, the company transports mostly grains (soybean and corn) and its byproducts (soybean meal). The railway to the Rio Grande port has been submerged for more than a week. The port handles the country's fourth-largest soybean export volumes, and it was closed for a few days. The grain inventory at the port was not damaged, but it represents only 2-3 days of the export volume. Grain transportation to the port is occurring via alternative roadways, increasing freight costs.

Rumo's operations in the state represent just a small portion of its rail network and cash flow, and its contracts with clients are take or pay that should protect cash flow. Most of Rumo's operations in Brazil's southern region in the states of Santa Catarina and Paraná, connecting the ports of Paranaguá and São Francisco do Sul.

We expect a limited effects on the operations of road operator JSL S.A. (BB-/Stable/--; brAA+/Stable/--), considering its small exposure to the state of Rio Grande do Sul and the company's nationwide presence. JSL has a contract to operate waste management in the city of Porto Alegre, which is suspended for now. It also announced that it is running its wood transportation concession at half a capacity.

Brazil's largest rent-a-car operators, Localiza Rent a Car S.A. (BBB-/Stable/--; brAAA/Stable/--) and Movida Participacoes S.A. (BB-/Stable/--; brAA+/Stable/--) have some exposure to Rio Grande do Sul. Localiza has about 20,000 vehicles in the state out of its total fleet of 625,659 as of the end of March 2024. According to the company, part of its stores, used-vehicle dealerships and rentals, are gradually resuming operations and losses are still difficult to measure. Movida operates 16 stores in the southern region, and only two of these were damaged but with a limited number of lost vehicles. Nevertheless, such losses, combined with the vehicles' still deeply depreciated rates, could hurt the companies' 2024 credit metrics.

Randon S.A. Implementos E Participacoes (brAA+/Positive/brA-1+), which produces trailers and semitrailers, has large operations in southern Brazil. The company is headquartered in the city of Caxias do Sul in the Rio Grande do Sul state, but the city didn't sustain major damage. According to the company, its local plants were not damaged: energy, water, and fuel supply haven't been interrupted. The company is currently operating with raw materials from its inventory. However, we expect supply-chain constraints as many roads in the state remain submerged, and the expected higher freight costs could pressure our upside scenario for the ratings. This is because the positive outlook on our rating on Randon reflects our expectation of deleveraging in the coming years and higher export volumes.

Chemicals And Fertilizers

Braskem S.A. (BB+/Stable/--; brAAA/Stable/--) operates one plant in the state of Rio Grande do Sul. The plant, which has been shut down since the end of last week, represents about 30% of Braskem's domestic ethylene production and generates a large share of total cash generation. Braskem's ethylene production rate in Brazil was 74% in the first quarter of 2024. We believe the company has available spare capacity in its plants in other parts of the country to adjust production, but if it takes long to resume operations in the state, cash flow could take a hit.

We assume a slower rebound in petrochemical spreads in 2024, after a weak 2023, due to uncertainties over global economic growth and the industry's capacity additions and maintenance shutdowns of several facilities. And, although we expect Braskem will continue implementing several cost-cutting and optimization initiatives, the lower output from its southern operations could weaken its leverage in 2024. Our current base-case scenario assumes the company's debt to EBITDA at 4.0x-4.5x by the end of 2024.

Fertilizer producers can suffer from lower demand for their products among farmers in Rio Grande do Sul who lost their crops in the floods. This is especially important given that fertilizer prices have been falling in the past 18 months and could further dent fertilizers' cash flow.

Retail/Malls

The floods have had a limited impact on retailers' operations in the state, including those we rate, given the low share of their sales coming from Rio Grande do Sul. Initially, we believe that some impact could come from the temporary closing of stores and inventory losses in the flooded areas or the consequent drop in customer traffic even among the stores that remained open. Grupo SBF S.A. (brAA-/Stable/--), Magazine Luiza S.A. (brAA-/Negative/--), and Grupo de Moda SOMA S.A. (brAA+/Watch Pos/--) are some of the companies we cover in the sector. Despite Lojas Renner S.A.'s (brAAA/Stable/--) headquarters in Rio Grande do Sul, only 11% of its stores are located in the state and less than 4% of them are temporalily closed. Although Atacadao S.A. (brAAA/Stable/--; owned by Grupo Carrefour Brasil) had to also temporarily close some its stores, we believe the ones that remained opened benefited from higher demand for essential goods amid the fear of potential supply shortages. Although none of these rated companies have large distribution networks in the state, we believe the flood-related damage and its knock-on effect on railroads, roads, and ports could result in logistics bottlenecks.

Multiplan Empreendimentos Imobiliarios S.A. (brAAA/Stable/--) operates two shopping malls in the state (BarraShoppingSul and ParkShopping Canoas), representing 14% of its current gross leased area (GLA). The company announced the temporary suspension of the construction of its residential real estate project, Golden Lake. It also partly suspended the operations of ParkShopping Canoas (5.6% of total GLA), keeping open only those stores that sell essential goods. BarraShoppingSul remains open, although it's currently experiencing a significantly lower customer traffic. Still, we don't expect Multiplan's operations to weaken, given a limited share of GLA in the state as a percentage of total portfolio. Additionally, Multiplan's cash flow is not directly linked to customer traffic, although the natural disaster could prompt leasing renegotiations with some of the company's tenants and higher maintenance costs.

Telecoms

Unifique Telecomunicacoes S.A. (brAA-/Stable/--) and Vero S.A. (brA+/Stable/--) operate in Rio Grande do Sul. According to Unifique, about 23,000 customers experienced connection problems after the floods--15% of clients in the state and 3% of total clients. Vero indicated that although 31 cities in which it operates have been damaged by the floods, currently only 1% of its clients were experiencing connection problems. Both companies, together with Brasil Tecnologia e Participações S.A. (not rated), have signed a technical cooperation agreement to help rebuild infrastructure in the state, especially to assist smaller local internet service providers that sustained heavy damage.  

Steel

The state of Rio Grande do Sul accounts for slightly less than 5% of the country's steel production, and it's home to Gerdau S.A.'s (BBB-/Positive/--; brAAA/Stable/--) two plants, for specialty steel and long steel. The company is currently prioritizing the safety of its employees and has suspended operations local plants, but it doesn't expect its total steel volumes to shrink this year.

Forest Products

Among the pulp and paper producers we rate, Empresas CMPC S.A. (CMPC; BBB/Stable/--) is the most vulnerable right now, as its largest pulp mill Guaiba (with a total production capacity of 2.25 million tons annually) and 210 hectares of forest are located in the state. The plant has not been damaged by the floods, but operations have been, and could continue to be, hampered by supply-chain problems given that many roads are still submerged. So far, the company has suspended operations of Guaiba's line 1 (361,000 tons of capacity) and is operating line 2 (1.88 million tons) at about 80% of its capacity. CMPC could return to normal production levels in the next few days. Overall, since the assets have not been damaged, we estimate the impact to its production should be minor, perhaps causing a reduction in pulp output by a few tons.

Suzano S.A. (BBB-/Stable/--; brAAA/Stable/--) does not have any assets nor does it own forest in the state, while Klabin S.A. (BB+/Stable/--; brAAA/Stable/--) only has a corrugated cardbox plant in Rio Grande do Sul. We don't expect any material impact on these two companies.

Infrastructure

We believe that electricity distributors and water utilities will face a modest impact, given investments to restore the power supply and water networks in the flooded areas. Although physical and financial impacts caused by the flooding are still uncertain because of the damaged infrastructure, we don't expect rating changes among infrastructure entities. This is because the companies operating in Rio Grande do Sul are part of larger groups that benefit from relatively stable and predictable cash generation, as tariffs are usually adjusteded to inflation and demand for infrastructure services remains relatively steady.

In addition, we expect the current situation to be temporary, and essential infrastructure services to be back online once the water levels recede. Also, cash generation from the infrastructure groups' operations in Rio Grande do Sul represents 10%-20% of their consolidated cash flows, while only some of their assets have been compromised. The groups with higher exposure to the state, such as CPFL Energia S.A. (brAAA/Stable/--) and AEGEA Saneamento e Participacoes S.A. (brAA+/Stable/--), have a cushion in their credit metrics to sustain high-impact adverse events temporarily. The two project finance companies operating in the state, Pampa Transmissao de Energia S.A. and Usina Termeletrica Pampa Sul S.A., are single-asset entities, but their operations haven't been compromised so far.

Still, we will monitor required expenses and investments to repair and reconstruct the damaged infrastructure, including distribution and transmission networks, dams, highways, and bridges. We'll also monitor negotiations between concessionaires and the authorities for potential contractual rebalancing due to force majeure, and the impact on revenue and delinquency indicators, especially among sanitation and electricity distributors, as a significant portion of the population lost properties due to the floods. We believe insurance coverage may partially compensate for damages and lost profits, but this is still uncertain as it is difficult to quantify the actual loss.

Knock-On Effects Pose Risks

We do not expect immediate rating impacts, but there are substantial uncertainties and the situation is evolving. Also, the indirect impact on the abovementioned corporate sectors could come from higher-than-expected inflation (especially for food prices), the lower pace in interest-rate reductions, a hit to economic growth, and logistics and supply-chain challenges in the flooded areas.

This report does not constitute a rating action.

Primary Credit Analysts:Flavia M Bedran, Sao Paulo + 55 11 3039 9758;
flavia.bedran@spglobal.com
Wendell Sacramoni, CFA, Sao Paulo + 55 11 3039 4855;
wendell.sacramoni@spglobal.com
Secondary Contacts:Fabiana Gobbi, Sao Paulo + 55 11 3039 9733;
fabiana.gobbi@spglobal.com
Bruno Ferreira, Sao Paulo + 55 11 3039 9798;
Bruno.Ferreira@spglobal.com

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