Fitch Places Sugar & Ethanol Companies' Ratings on Negative Watch

Fitch Ratings has placed the existing corporate ratings of Biosev S.A. (Biosev), Jalles Machado S.A. (Jalles Machado), Tonon Bioenergia S.A. (Tonon), U.S.J. - Acucar e Alcool S.A (U.S.J.), and their respective issuances on Rating Watch Negative. At the same time, Fitch has affirmed the ratings of Raizen Energia S.A. with a Stable Outlook. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

These rating actions are due to increased systemic risk in the Brazilian sugar and ethanol (S&E) sector for issuers following the default by Aralco S.A. Industria e Comercio and Virgolino de Oliveira S.A. Acucar e Alcool's (GVO) announcement that it is considering a debt restructuring. These actions have made it increasingly difficult for companies to obtain working capital financing and to secure sugar cane from third parties.

Fitch expects continued pressure on S&E companies' free cash flow and liquidity over the next 12 months. The rebound of international sugar prices is taking longer than expected to materialize and hikes in ethanol prices are uncertain given the political issues surrounding Brazilian energy policies. Crushed volumes will fall across the board in fiscal 2015 due to the unusually dry weather conditions in Brazil's largest sugar cane-producing region. As a result of declining agriculture yields, crushing volumes are projected to decline, which hurts fixed cost dilution and raises the level of breakeven prices. The state of Sao Paulo, where U.S.J. and Tonon concentrate their crushing operations and Biosev runs 55% of its crushing capacity, has been the most affected by this unusually dry season. Jalles Machado is not likely to be affected as it runs its two mills in the State of Goias, which is not affected by the dry weather.

Raizen Energia S.A.'s (Raizen) sizeable scale, extensive fuel distribution network and diversified asset base have given it a credit profile that is able to withstand this period of high cash burn. Raizen is the leading global sugar and ethanol producer, with 11% market share in Brazil's fragmented market. It is also the third largest fuel distributor in Brazil and the largest generator of biomass energy in the country. The downstream business currently accounts for approximately 45% of Raizen's EBITDA and 41% of its cash flow from operations (CFFO), which therefore reduces the cash flow volatility associated with the sugar and ethanol industry. Raizen has a strong liquidity position of BRL2.3 billion. Its shareholders, Shell Brazil Holdings BV, which is a subsidiary of Royal Dutch Shell Plc (rated 'AA' by Fitch), and Cosan S.A. Industria e Comercio ('BB+'), further support the company's liquidity position through a USD500 million stand-by committed line of credit.

RATING SENSITIVITIES

The current level of cash burn and the weak liquidity position will result in near-term downgrades if sugar and ethanol prices do not recover quickly and substantially.

Higher prices for sugar and ethanol that would lead to more robust operating cash flows and improved liquidity positions could result in positive rating actions. Any government measures that lead to increased demand for ethanol in Brazil or increased bank lending to the sector would be viewed positively. A transparent policy by Petrobras for regularly adjusting local fuel prices would also likely improve lenders' confidence in the sector and could also lead to positive rating actions.

Fitch has placed the following ratings on Negative Watch:

Biosev S.A.

--Foreign and local currency Issuer Default Ratings (IDRs) 'BB-';

--Long-term national scale rating 'A+(bra)'.

Jalles Machado S.A.

--Foreign and local currency IDRs 'BB-';

--Long-term national scale rating 'A+(bra)'.

U.S.J. - Acucar e Alcool S.A.

--Foreign and local currency IDRs 'B+';

--Long-term national scale rating 'A-(bra)';

--USD275 million senior unsecured notes due 2019 'B+/RR4'.

Tonon Bioenergia S.A.

--Foreign and local currency IDRs 'B';

--USD300 million senior unsecured notes due 2020 'B/RR4';

--USD230 million senior secured notes issued by Tonon Luxembourg S.A. and guaranteed by Tonon Bioenergia S.A. due in 2024 'B/RR4'.

In addition, Fitch affirmed the following ratings:

Raizen Energia S.A.

--Foreign currency IDR at 'BBB';

--Local currency IDR at 'BBB';

--National scale rating at 'AAA(bra)'.

Raizen Combustiveis S.A.

--Foreign currency IDR at 'BBB';

--Local currency IDR at 'BBB';

--National scale rating at 'AAA(bra)'.

Raizen Energy Finance Limited (Raizen Energy Finance):

--Senior unsecured notes due in 2017 at 'BBB'.

The Rating Outlook for Raizen Energia S.A and affiliates remains Stable

The agency also rates other sugar and ethanol companies as follows, whose ratings were not affected:

Aralco S.A. Industria e Comercio:

--Foreign and local currency IDRs 'D';

--National long-term rating 'D(bra)';

--USD250 million senior unsecured senior notes due 2020 issued by Aralco Finance S.A. 'C/RR5'.

Virgolino de Oliveira S.A. Acucar e Alcool

--Foreign and local currency IDRs 'CC';

--Long term national scale rating 'CC(bra)';

--BRL100 million senior unsecured debentures due 2014 'CC(bra)'.

Virgolino de Oliveira Finance S.A.

--USD300 million senior unsecured notes due 2022 'CC/RR4';

--USD135 million senior secured notes due 2020 'CC/RR4';

--Foreign and local currency IDRs 'CC'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'National Scale Ratings Criteria' (Oct. 31, 2013).

Applicable Criteria and Related Research:

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=906194

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