JSL S.A. Assigned 'BB' Rating; Outlook Is Negative

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1 Research Update: JSL S.A. Assigned 'BB' Rating; Outlook Is Negative Primary Credit Analyst: Marcus Fernandes, Sao Paulo (55) ; Secondary Contact: Flavia M Bedran, Sao Paulo (55) ; flavia.bedran@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Recovery Analysis Related Criteria And Research Ratings List SEPTEMBER 6,

2 Research Update: JSL S.A. Assigned 'BB' Rating; Outlook Is Negative Overview JSL is one of the largest logistics providers in Brazil, with significant experience in cargo transportation and internal logistics solutions, and a broad portfolio of services and products. The company has also been expanding its car rental operations through its subsidiary, Movida, bolstering business diversification. Despite JSL's resilient business model and favorable industry growth trends in the mid-to-long term, we expect current market conditions to limit the company's ability to improve its financial metrics in the short term. We're assigning our 'BB' global scale corporate credit rating to JSL. The negative outlook reflects our view that the company will continue to face challenges to reduce leverage, stemming from Brazil's weak economy, still high interest rates, slow industrial activity that can depress demand for logistics services, and tight credit conditions that can take a toll on some of JSL's clients. These conditions would limit its ability to generate positive free cash flows and improve credit metrics. Rating Action On Sept. 6, 2016, S&P Global Ratings assigned its 'BB' global scale corporate credit rating to JSL S.A. The outlook is negative. Rationale The rating reflects the company's position as one of the largest logistics service providers in Brazil, with diversification into light vehicle rental and fleet management. The company's operating efficiency also highlights JSL's ability to adequately price its contracts, and sell used vehicles through its integrated vehicle sale structure, including new and used vehicle dealerships. We expect such efficiencies and competitive advantages to continue supporting our view that JSL will keep expanding its business over the next few quarters, although at a more conservative pace than historical average due to Brazil's economic slump. Nevertheless, we expect JSL would face difficulty to improve its financial metrics, given our expectations of still high interest rates that can reduce the profitability of the company's contracts in the short term. As a result, we expect JSL's interest coverage and FFO-to-debt metrics to remain pressured for the 'BB' rating category over the next few quarters, close to 1.5x and 12%, respectively. SEPTEMBER 6,

3 Our analysis of JSL's business risk profile is based on the company's scale of operation in the Brazilian market, the long-term profile of its contracted position, and operating efficiency given its diversification into synergic businesses, such as logistics, car and fleet rental, and vehicle dealerships. We expect JSL to continue benefiting from such a diverse portfolio of services in the short term, because we believe the company would continue capturing new service contracts despite the weak market conditions in Brazil. We do, however, expect JSL will face challenges to maintain its historical profitability level. That's because high interest rates would reduce the profitability of the company's legacy contract portfolio, while new contracts would incorporate higher rates and stronger competition. Also, maintaining high utilization rates and improving profitability at Movida, JSL's car rental subsidiary, will prove difficult, given our expectations of still limited corporate travel volume and declining traffic for leisure travel. JSL's financial metrics are likely to continue reflecting the company's historically aggressive growth strategy over the next few quarters, given that it funded its growth mainly with debt. The more conservative growth plan for the next few quarters should allow JSL to slowly improve its free operating cash flow (FOCF) generation and start reducing its leverage, with debt to EBITDA of about 4.0x by the end of However, the still high interest rates in Brazil are likely to continue weighing on JSL's funds from operations (FFO) generation and interest coverage ratios, because we expect FFO to debt of about 12%, and EBITDA interest coverage of about 1.5x. Our base case assumes: Brazil's GDP contracting by 3.6% in 2016 and expanding by 1% in 2017, which can affect demand for new contracts; Inflation rate of 7.5% in 2016 and 6% in 2017, affecting costs and average contract rates; Revenues increasing by 13% in 2016 and 8% in 2017; Growth of Movida's fleet of 5% in 2016 and 10% in 2017; Fleet renewal for logistics services being unlikely, given the currently high funding costs for new equipment purchases; Capex of about Brazilian real (R$) 1.8 billion in 2016 and R$2.2 billion in 2017; and Dividend payout of 25% of previous year's net income. Based on these assumptions, we arrive at the following credit measures: Revenue of R$6.8 billion in 2016 and R$7.3 billion in 2017; EBITDA margin of 19% for the next two years; FFO of around R$600 million in 2016 and R$700 million in 2017; Free operating cash flow (FOCF) in the R$50 million-r$100 million range for the next two years; Debt to EBITDA of about 4.0x in 2016, and close to 3.6x in 2017; and FFO to debt of around 12% in 2016 and approaching 15% in SEPTEMBER 6,

4 Liquidity We view JSL's liquidity position as adequate, mainly due to the company's robust cash position and our expected cash generation for the year. Also, the company has a R$150 million committed credit line that's fully available until However, JSL has a large amount of debt maturing in the short term, including funding obligations for the acquisition of vehicles. On the other hand, although we expect investment needs to be somewhat lower over the next 12 months, we believe JSL can reduce capex if needed because the latter is almost entirely related to new vehicles and equipment acquisition, which will only be purchased in case JSL has new contracts and adequate funding sources. The bulk of JSL's forecasted capex will be funded through used vehicles sales. In this sense, we expect sources of liquidity to exceed uses by more than 1.2x for the next 12 months. JSL is subject to financial covenants under some of its debt contracts that require the maintenance of net debt to adjusted EBITDA (EBITDA adjusted by the cost of vehicles sold) below 3.5x, and adjusted EBITDA to net financial expenses over 2.0x, which we expect the company to continue to meet with significant headroom, even if EBITDA was to decline by 15%. Principal Liquidity Sources Cash position of R$1.3 billion as of June 30, 2016; Cash generation of R$2 billion expected for 2016, including vehicle sales; and Committed credit line of R$150 million due Principal Liquidity Uses Short-term debt of R$1.3 billion as of June 30, 2016; Working capital needs of R$80 million in 2016; Capex for fleet renewal of R$1.3 billion in 2016 and R$1.4 billion in 2017; and Minimum dividend payout of 25% of the previous year's net income. Outlook The negative outlook reflects our expectations that the company's credit metrics will remain pressured for the 'BB' rating category, given that we believe interest rates will remain high through the end of However, we expect the company to improve its cash generation slightly through the year, due to its more conservative growth strategy. Under such a scenario, debt to EBITDA would remain around 4.0x and FFO to debt at about 12% over the next 12 months. Downside scenario We could downgrade JSL if market conditions further weaken, resulting in either increasing delinquency rates or persistently high financial costs, SEPTEMBER 6,

5 leading to debt to EBITDA consistently above 4.0x, FFO to debt close to 12%, and an FOCF shortfall. A negative rating action on the sovereign rating could also trigger a rating downgrade on JSL, given its high risk exposure to the Brazilian domestic economy. Upside scenario An upgrade is currently unlikely, given our low expectation of significant improvements in Brazil's macroeconomic environment. However, we could revise the company's outlook to stable if JSL posts stronger-than-expected financial metrics through higher operating efficiency, such as debt to EBITDA consistently below 4.0x, FFO to debt above 20%, and positive FOCF generation. Ratings Score Snapshot Corporate Credit Rating: BB/Negative/-- Business risk: Fair Country risk: Moderately High Industry risk: Intermediate Competitive position: Fair Financial risk: Aggressive Cash flow/leverage: Aggressive Anchor: bb- Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Liquidity: Adequate (no impact) Financial policy: Neutral (no impact) Management and governance: Fair (no impact) Comparable rating analysis: Positive (+1 notch) Recovery Analysis Key analytical factors We rate JSL's senior unsecured national scale debt at 'bra+', the same level as the company's national scale corporate rating, also reflecting the recovery rating of '3' with recovery prospects of around 50-70%, in the higher end of the range. This level of recovery reflects mainly the amount of senior unsecured debt, while our discrete asset valuation still points to relevant value for recovery after priority liabilities and secured debt. Our simulated default scenario encompasses a combination of high delinquency SEPTEMBER 6,

6 rates on JSL's portfolio of contracts, a severe weakening on the Brazilian used car market (resulting in lower cash generation), and a significant increase in interest rates. We have valued the company on a going-concern basis, using DAV (discrete asset valuation). We applied an overall 50% haircut to the company's current asset base, arriving at a stressed valuation of about R$4.2 billion. We rate JSL's senior unsecured national scale debt at 'bra+', the same level as the company's national scale corporate rating, also reflecting a recovery rating of '3' with recovery prospects of around 50%-70%. This level of recovery reflects mainly the relevant value available for recovery due to the company's sizable vehicle fleet, despite the significant amount of secured debt. Our simulated default scenario encompasses a combination of high delinquency rates on JSL's portfolio of contracts, a severe weakening on the Brazilian used car market (resulting in lower cash generation), and a significant increase in interest rates. We have valued the company on a going-concern basis, using DAV (discrete asset valuation). We applied an overall 50% haircut to the company's current asset base, arriving at a stressed valuation of about R$4.2 billion. Simulated default assumptions Simulated year of default: % haircut to the book value of the vehicles maintained as inventory, available for sale and treated as fixed assets. 60% haircut to machinery, buildings, and land. Average haircut of 50% in total assets book value, resulting in a stressed valuation of about R$4.2 billion. Simplified waterfall Priority liabilities (labor and wages): R$187 million Secured debt (equipment and vehicles financing and leases): R$1.2 billion Unsecured debt: R$3.9 billion Expected recovery of unsecured debt: 50%-70% Related Criteria And Research Related Criteria S&P Global Ratings' National And Regional Scale Mapping Tables - June 01, 2016 Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt - August 10, 2009 Methodology For Applying Recovery Ratings To National Scale Issue Ratings - September 22, 2014 Methodology: Jurisdiction Ranking Assessments - January 20, 2016 Use Of CreditWatch And Outlooks - September 14, 2009 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, SEPTEMBER 6,

7 Insurance, And Sovereign Issuers - May 07, 2013 Group Rating Methodology - November 19, 2013 Country Risk Assessment Methodology And Assumptions - November 19, 2013 Industry Risk - November 19, 2013 Key Credit Factors For The Railroad And Package Express Industry - August 12, 2014 Management And Governance Credit Factors For Corporate Entities And Insurers - November 13, 2012 Liquidity Descriptors For Global Corporate Issuers - December 16, 2014 Corporate Methodology - November 19, 2013 Corporate Methodology: Ratios And Adjustments - November 19, 2013 National And Regional Scale Credit Ratings - September 22, 2014 Ratings List New Rating; CreditWatch/Outlook Action JSL S.A. Corporate Credit Rating BB/Negative/-- Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. Complete ratings information is available to subscribers of RatingsDirect at and at All ratings affected by this rating action can be found on the S&P Global Ratings' public website at Use the Ratings search box located in the left column. SEPTEMBER 6,

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