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Cosan Trades Like Investment Grade on Shell Accord Speculation

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June 16 (Bloomberg) — Cosan SA Industria & Comercio’s bonds are trading like investment-grade assets on speculation the world’s largest sugar-cane processor will complete a $12 billion joint venture with Royal Dutch Shell Plc.

The yield on Cosan’s dollar bonds due 2014, which are rated BB- by Standard & Poor’s, or three levels below investment grade, was 14 basis points less than the average for BBB-rated corporate securities in Latin America, according to data compiled by Trace and Credit Suisse Group AG. On Jan. 29, the last trading day before Barra Bonita, Brazil-based Cosan announced it was planning a partnership with Shell, the debt yielded 171 basis points more than that of BBB-rated companies.

The bonds will keep rallying because the agreement to combine ethanol, sugar and fuel distribution assets with Shell may earn Cosan an investment-grade rating by cutting debt ratios, according to Cornel Bruhin, who oversees $400 million of emerging-market assets at Clariden Leu AG.

“For Cosan, the deal is a game changer,” Bruhin, who bought some of the 2014 bonds this month, said in a telephone interview from Zurich. “There’s an opportunity for the company to be a major energy player in Brazil. There’s more upside for the bonds.”

Bonds Rally

Yields on Cosan’s $350 million of 9.5 percent notes due 2014 declined 177 basis points, or 1.77 percentage points, since Jan. 29 to 5.81 percent, outpacing the 22 basis-point average drop in Brazilian corporate dollar debt over that time, according to JPMorgan Chase & Co.’s CEMBI index. The price on the Cosan bonds climbed six cents to 113 cents on the dollar even as sugar, the company’s biggest product, sank 46 percent from its 21-year high in January.

The accord calls for Cosan and Shell, Europe’s largest oil company by market value, to each contribute $4.9 billion in assets to the joint venture, according to a Feb. 1 statement. The companies have until the end of July to complete the accord.

A Cosan official in Sao Paulo who asked to remain anonymous in accordance with company policy declined to comment on the status of negotiations yesterday. Ted Rolfvondenbaumen, a spokesperson in Houston for Shell, wasn’t immediately able to comment. Hague-based Shell, which is rated AA by S&P, reported a 57 percent increase in earnings in the first quarter from a year earlier to $5.5 billion.

Rating Increase

Cosan’s leverage ratio — as measured by net debt to earnings before interest, taxes, depreciation and amortization – – may fall to 1 after the agreement from 3.3 at the end of the third quarter, according to a February report by Itau Unibanco Holding SA, Brazil’s biggest bank by market value.

Both S&P and Moody’s Investors Service placed Cosan on positive outlook after the Feb. 1 announcement. Moody’s, which rates Cosan Ba3, or three levels below investment grade, said in a March 1 report that the joint venture could result in “more than a one-notch” upgrade of Cosan’s existing senior unsecured rating. Cosan’s credit profile is likely to “improve,” Moody’s analysts wrote in the report.

Cosan plans to hold “a new realm” of conversations with rating companies this week, Chief Financial Officer Marcelo Martins said in a June 11 conference call with analysts. The company expects a rating increase after the joint venture is completed, he said.

‘Big Brother’

Filippe Goossens, the analyst who covers Cosan for Moody’s in New York, didn’t return telephone calls seeking comment after business hours yesterday. Cibele Santos, a spokeswoman for S&P, didn’t return calls and e-mails.

Cosan “gets a big brother — a very wealthy big brother,” said Jansen Moura, a corporate bond analyst with BCP Securities in Rio de Janeiro, said in a telephone interview. “If you’re a bondholder, you’re happy because of the de-leveraging, the fact that you may have more cash flow coming in over the coming years. You have a company with a better financial situation than the one from which you bought the bonds.”

Moura has a “marketperform” rating on Cosan bonds, saying the rally over the past four months left the debt “priced to perfection.” Bruhin said the price on the bonds will climb at least another 3 percent if the company makes investment grade.

Cosan had total debt of $2.9 billion as of March 31, including $400 million of dollar bonds due in 2017, according to Barclays Plc analysts Juan Cruz and Autumn Graham.

Real Gains

The extra yield investors demand to own Brazilian government dollar bonds rather than U.S. Treasuries narrowed 11 basis points to 223 yesterday, according to JPMorgan’s EMBI+ index. The spread has increased from 196 at the end of April.

The cost of protecting the nation’s debt against non- payment for five years with credit-default swaps fell two basis points yesterday to 133, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The real rose 1.3 percent to 1.7875 per dollar yesterday. It’s up 1.8 percent this month, following a 4.5 percent plunge in April. The yield on Brazil’s interest-rate futures contract due in January, the most active in Sao Paulo trading, climbed six basis points to 11.23 percent.

Cosan’s shares jumped 11 percent, the most in 10 months, when the partnership was unveiled on Feb. 1. They have declined 8.1 percent since to 21.67 reais yesterday.

Cosan, founded in 1936 by the Ometto family in Sao Paulo, reported its fourth consecutive quarterly profit last week, earning 308.7 million reais in the three months ended March 31.

The Shell accord follows Cosan’s 2008 purchase of 1,500 gas stations and other assets in Brazil from Exxon Mobil Corp. for $826 million. The combination with Shell will create the second- largest fuel distributor in the country after state-owned Petroleo Brasileiro SA, according to Eric Ollom, chief emerging- market strategist with Jefferies & Co. in New York.

“The deal is transformational for Cosan,” Ollom said in a telephone interview. “We continue to be positive on the credit.”

–With assistance from Lucia Kassai in Sao Paulo. Editors: David Papadopoulos, Lester Pimentel

To contact the reporters on this story: Ye Xie in New York at [email protected] Gabrielle Coppola in New York at [email protected]

To contact the editor responsible for this story: David Papadopoulos at [email protected]


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