Fitch: JV with Banco do Brasil Neutral to Cielo's Ratings

Fitch Ratings considers the proposal to create a joint venture (JV) between Cielo S.A. (Cielo) and Banco do Brasil S.A. to be credit neutral to Cielo's ratings.

On Nov. 20, 2014, Cielo announced the proposal to establish a JV with Banco do Brasil to manage the bank's payment account under 'Ourocard arrangement', which includes credit and debit transactions issued by the bank under Mastercard, Visa, American Express and Elo brands. If the transaction is concluded under the current terms and conditions, Cielo will control 70% of the new company and Banco do Brasil 30%.

Fitch views the transaction positive to Cielo that will benefit from increased revenue diversification in a resilient and growing business. The JV's main source of revenues will be the interchange fee over the relevant volume of credit and debit transactions under 'Ourocard arrangement', with an estimated EBITDA generation of more than BRL800 million. Competition in the merchant acquiring and payment processing industry in Brazil significantly increased in the last few years and is pressuring the net merchant discount rate (MDR), while the interchange fee has been more stable.

The JV's creation should not add risk to Cielo's business. The company will remain with virtually no direct credit exposure to cardholders, while Banco do Brasil will be responsible for the credit analysis and concession of cardholders.

Cielo's leverage will increase following the transaction, as the company's capital investment of BRL8.1 billion will be financed with debt. On a pro forma basis, net debt/adjusted EBITDA ratio, including financial income derived from the discounting and pre-payment of receivables to merchants, will increase to 1.6x, from 0.4x in the LTM ended September 2014, still acceptable for the company's rating category. However, the transaction will reduce Cielo's financial flexibility for future acquisitions. In Fitch's opinion, Cielo's higher leverage will be partially mitigated by the expected increase in its cash flow generation capacity and by lower dividends, as the company approved to reduce its minimum dividends distribution to 30% of net profit, from 50%.

Fitch currently rates Cielo and Cielo USA Inc. as follows:

Cielo

--Foreign currency Issuer Default Ratings (IDR) 'BBB+';

--Local currency IDR 'BBB+';

--Long-term national scale rating 'AAA(bra)'.

Cielo USA Inc.

--Senior unsecured notes due 2022 'BBB+'.

The Rating Outlook for the corporate ratings is Stable.

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

Applicable Criteria and Related Research:

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

Applicable Criteria and Related Research:

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

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

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