Fitch Ratings has assigned an 'A+(bra)' national long-term rating to the proposed second debenture issuance of Brookfield Incorporacoes S.A. (Brookfield Incorporacoes), in the amount of BRL405 million. The issuance will be placed in two series and the amounts are still to be defined. The first series is due on Jan. 15, 2014 and the second on Jan. 15, 2016. The proceeds will be used to refinance short-term debt and for company general purposes. Fitch has already rated Brookfield Incorporacoes' foreign and local currency Issuer Default Ratings (IDRs) 'BB-', and national long-term rating 'A+(bra)'. The Rating Outlook of the corporate ratings is Stable.
Brookfield Incorporacoes' ratings reflect the integration of the company's operations, which include a solid and geographically diversified land bank (Potential Sales Value (PSV) of BRL16.7 billion in September 2009); the strong shareholders structure and the capital support of the controlling group; and its operating scale expansion through strategic acquisitions carried out in 2008, which diversified the mix of project launches by segment and region, and led the company to rank among the country's four largest real estate developers, in terms of project launches. The ratings also benefited from the strengthening of its capital structure and liquidity with the recent capital inflow of BRL543 million by public offering; and the maintenance of a robust reserve of receivables of completed units not linked to debt. The ratings also consider the return of the net leverage to levels more adequate for the ratings, following the capital increase. The company has as a major challenge to obtain a greater generation of funds and EBITDA from the consolidated operations in an environment of increased competition and lower operating margins, as a result of the greater participation on residential projects for the low and middle income segments, which have lower margins, however with a shorter construction cycle.
Capital Structure Strengthened by Capital Inflow; Increased Liquidity to Continue Expansion:
The inflow of BRL534 million from the subscription of new shares in November 2009 significantly reinforced Brookfield Incorporacoes' liquidity position and financial structure. As of Sept. 30, 2009, cash and marketable securities totaled BRL270 million. In addition, Brookfield Incorporacoes had a robust liquidity reserve of receivables of completed units, not linked to debt, amounting to BRL620 million. The liquidity position, adjusted by the free receivables, limited the refinancing risks related to the concentration of its short-term debt (44%), in the amount of BRL550 million. The proceeds from the capital increase strengthened the company's capital structure and its capacity to continue expanding in its target markets. Brookfield Incorporacoes' expansion strategy is supported by its diversified land bank, with about 70% of the total eligible for credit lines from the Housing Financial System (SFH), and investments in its real estate portfolio, including possible acquisition of companies.
More Adequate Debt Profile following the Debenture Issuance:
The payment of most of its short-term debt with the proceeds of the proposed debenture issuance should length the distribution of short term debt maturities into the long term. Fitch also expects an improvement in the debt structure as a result of Brookfield Incorporacoes' strategy of gradual substitution of corporate debt by SFH financings, which preserve cash flow since the payment of principal is based on the transfer of receivables.
At the end September 2009, total consolidated debt was BRL1,257 million, compared to BRL1,080 million at the end 2008. If only Brookfield Incorporacoes is considered, total debt was BRL473 million at end September 2008. The increase in total debt reflects the company's new business volume after the incorporation of Brookfield Sao Paulo (former Company S.A.) and MB Engenharia S.A., and the strong expansion of project launches, notwithstanding a more challenging environment affected by the global crisis.
Leverage Expected to Decline in the Next Two Years:
During 2009, Brookfield Incorporacoes' leverage continued to be strongly pressured by the strategic acquisition moves undertaken by the company over the past 18 months and by the continued business growth. Leverage, measured by the adjusted net debt/EBITDA ratio, was 3.5 times (x) at the end September 2009, compared to 3.9x at end 2008 and 1.8x at the end September 2008. The capital increase strengthens the company, which combined with a probable EBITDA increase, should enable the company to reduce its net leverage to below 2.2x at the end of 2009 and in 2010. Fitch believes that the increase in EBITDA and the strategy to use SFH financings for housing construction on a larger scale, which are repayable with the future transfer of receivables, should enable a leverage ratio, excluding SFH financings, below 2.5x in 2010.
Strong Sales Growth Assured EBITDA Increase:
Despite the effects of the global crisis, which retracted the domestic real estate sector, Brookfield Incorporacoes' pre sales remained high. The good sales performance, driven since the second quarter of 2009 by the recovery of the domestic economic environment; improvement in sector fundamentals; greater diversification of project launches by income segment and region; and important support of the Brazilian government resulted in an adjusted EBITDA generation of BRL281 million in the last 12 months (LTM) ended September 2009, compared with the pro forma EBITDA of BRL215 million in 2008.
The incorporation of Brookfield Sao Paulo and Brookfield Incorporacoes' greater participation in the low and middle income residential segments resulted in lower consolidated operating margins. In the LTM ended September 2009, the consolidated adjusted EBITDA margin was 18.2%, well below the 27.1% reported in 2008 and 39.1% of Brookfield Incorporacoes alone in the LTM ended September 2008. This result, however, remains compatible with the sector average. Fitch expects that the company's increased focus in the low and middle income segments, with high growth potential, will nominally increase EBITDA in 2009 and 2010, even though margins should remain at lower levels, around 20%.
Potential Rating or Outlook Drivers:
Changes in the sector's fundamentals could negatively impact the company's liquidity and, consequently, its classification. Events like an increase in leverage, a decline in operating margins to levels below the sector average, or a significant reduction in liquidity could lead to consideration of a Negative Outlook or a rating downgrade. The classification could be upgraded in the case of a consistent improvement of its credit metrics, liquidity position and cash generation capacity, combined with a more lengthened corporate debt profile.
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