Leverage Squeezes Lupatech Outlook

S&P has cut to negative its outlook on Lupatech’s BB minus rating, though it assumes the company will successfully refinance a significant portion of debt maturities after obtaining a BRL441m long-term loan from BNDES. “The negative outlook on Lupatech reflects its significant leverage for the rating category, and its considerable debt position, which increases its interest burden and reduces free cash flows,” says S&P credit analyst Piero Parolin. “The negative outlook also reflects our expectation that Lupatech’s financial ratios will recover at a slower pace than we had originally anticipated and that this improvement will depend on significant revenue expansion over next few years.” The ratings reflect the company’s acquisitive growth strategy, contributing to somewhat weak credit measures until acquired companies are fully integrated. S&P also notes pressures on working capital stemming from rising receivables and inventories; aggressive debt leverage and credit metrics; and the expectation that Lupatech will reduce its growth through acquisitions after the recent conclusion of its program. “We also expect the company to refinance a significant portion of its debt maturities over the next 3 years, reducing its interest expenses,” says S&P.