Investing.com -- Moody’s Ratings has altered its ratings review direction for Hidrovias do Brasil S.A. (Hidrovias) towards an upgrade from a previous downgrade. This change includes the B1 corporate family rating of Hidrovias and B1 backed senior unsecured ratings of the notes issued by Hidrovias International Finance S.a.r.l. due in 2031. These notes are fully and unconditionally guaranteed by Hidrovias and its wholly-owned subsidiaries, excluding the bauxite operations subsidiaries. The ratings outlook remains under review.

The shift in direction for Hidrovias’ rating review was triggered by the acquisition of Hidrovias by Ultrapar Participações S.A. (Ultrapar, Ba1 positive). On May 9, Ultrapar announced that it would guarantee a proposed issuance of up to BRL2.2 billion in debentures by Hidrovias. This issuance will make up the majority of Hidrovias’ total debt (60%-70% on a pro-forma basis, considering total debt at the end of the first quarter of 2025). The issuance’s proceeds will bolster liquidity and support the tender of Hidrovias notes due 2031 ($442 million).

Previously, Hidrovias’ ratings were under review for a downgrade after the cancellation of a proposed capital increase of up to BRL1.5 billion that was expected to close in December 2024. On February 28, 2025, Hidrovias initiated a new capital increase of up to BRL1.2 billion. This capital increase was fully subscribed and approved by Hidrovias’ board of directors on May 8. At the transaction’s conclusion, Ultrapar revealed that its subsidiary, Ultrapar Logística Ltda, had subscribed to over 682 million shares, thus acquiring a 50.15% stake and control of Hidrovias.

The capital increase significantly reduced Hidrovias’ refinancing risk. It will eliminate a BRL500 million liability related to Advance for Future Capital Increase provided by Ultrapar Logística, amortize BRL400 million debentures raised in January 2025, and boost the company’s cash balance. During the initial review period, Hidrovias amortized a $150 million bond due in January 2025.

The review for upgrade will consider the execution of the proposed liability management and the percentage of Hidrovias’ total debt that will be guaranteed by Ultrapar. After the proposed issuance’s execution, it’s expected that 60%-70% of Hidrovias’ total debt will be guaranteed by Ultrapar. The ratings could be upgraded by one or two notches with the completion of both the debenture issuance and the result of the outstanding notes’ tender. If Hidrovias’ capital structure does not become majoritarily guaranteed by Ultrapar, the ratings could remain at the current level at the review process’s end.

The B1 ratings incorporate Ultrapar’s position as the controlling shareholder and its apparent commitment to Hidrovias. The rating also takes into account the successful execution of the capital increase and Hidrovias’ improved liquidity and financial flexibility to implement expansion investments in its North Corridor.

Hidrovias’ results were negatively affected in 2024 by severe restrictions in the navigability in its South and North corridors. A sharp drop in EBITDA starting in the fourth quarter of 2023 led to an increase in its Moody’s adjusted gross leverage to 13.2x as of the last twelve months that ended in March 2025. Moody’s adjusted gross leverage is expected to reach 4.8x by December 2025 and 4.3x by December 2026, with an improvement in the company’s EBITDA to BRL826 million in 2025 from BRL202 million in 2024, and debt to remain at or below BRL4 billion compared to BRL5.1 billion in December 2024.

Hidrovias’ ratings primarily reflect the company’s robust business model, with about 80% of its revenue coming from long-term take-or-pay agreements with strong off-takers. These agreements contain minimum volume guarantees and cost pass-through clauses, leading to predictable cash flow, high capacity utilization rates, and high operating margins for the company. The positive outlook on agricultural production and waterborne transportation in Brazil and Paraguay, and Hidrovias’ operations’ strategic location, also support its ratings.

The ratings are limited by the company’s high gross leverage, short operating history, and small size compared to its rated peers. The high degree of product and geographic concentration also limits Hidrovias’ ratings as it exposes the company to adverse weather conditions that could restrict agricultural production and river navigability. As an inland operator, the company is exposed to climate-related risks such as low rainfall and river water levels, which can impact volumes and may increase costs. Hidrovias also has a high degree of client concentration, although the clients’ good credit quality and history of contract compliance mitigate related risks.

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