Fitch Ratings has assigned a long-term national scale rating of 'A+(bra)' to MRV Engenharia e Participacoes S.A.'s (MRV) BRL100 million two-year second issuance of debentures, guaranteed by fiduciary lien of real estate assets. The proceeds will be used to prepay MRV's first issuance of commercial paper, which is being used in the construction of housing units. Fitch rates MRV's long-term national scale 'A+(bra)'. The Rating Outlook for the corporate rating is Negative.
The ratings reflect a combination of MRV's adequate financial profile and the strength of its business. The company has been efficient in maintaining a sustainable growth of its activities with high margins in its projects, and preserved low leverage and moderate liquidity. The ratings also consider MRV's long standing specialization in residential projects for the low income segment and the satisfactory access to appropriate funding sources for the development of its projects; the limited exposure to homebuyer risk; and the geographically diversified land bank.
MRV's Negative Outlook for the corporate rating reflects the rating action taken by Fitch for the overall homebuilding sector on Jan. 21, 2009, reflecting the expectation that homebuilders in Brazil will face a challenging operating environment as well as significant financial pressures in 2009 and 2010.
MRV's business model benefits from standard homebuilding projects, financed by appropriate funding sources. The company's operating margins and working capital needs are positively impacted by its short construction cycle and by higher funding availability. The average price per unit sold by MRV stands within the low income category, which is eligible to receive funding from the National Housing Bank - Caixa Economica Federal (CEF). About 95% of CEF's funds are released during the construction phase, which allows MRV to report leverage lower than industry average. In 2008, about 34% of pre sales was financed directly by CEF, compared to 17% in 2007. Fitch expects that the percentage of pre sales financed by CEF will further increase in 2009, following the significant growth noted throughout 2008, from 13% in the first quarter of 2008 to 67% in the last quarter.
MRV should benefit, in the medium to long term, from the large housing deficit in Brazil and the recently implemented Brazilian government programs to stimulate the homebuilding sector. However, MRV's business is exposed to the effects of a significant downturn in the domestic economy and the negative consequences in unemployment rates and income level, which would negatively impact the company's continuity of growth and performance.
MRV's liquidity position was significantly reduced in the course of 2008. The increased scale of project launches resulted in higher pressure for cash resources, weakening its liquidity. The BRL100 million issuance (debentures) is already in course and should support a more adequate cash position of around BRL200 million, and in line with the high number of projects under construction. At the end of 2008, MRV reported cash and marketable securities of BRL149 million and total debt of BRL427 million, compared to BRL605 million and BRL23 million, respectively, at the end of 2007. MRV faces BRL125 million of maturing debt up to the end of 2010, which indicates a manageable position as per Fitch's expectations regarding the company's liquidity and cash generation.
MRV's credit metrics remain robust for this rating category, despite a moderate worsening in 2008. Leverage in the period, measured by total debt/EBITDA, was 1.6 times (x), compared to 0.2x in 2007. If Housing Financial System (SFH) loans are excluded, leverage would be reduced to 1.2x. The ratings assigned already contemplate the fact that MRV's leverage will increase in 2009 but will remain below 3.0x and that more than half of future debt will be funded through SFH financings.
MRV generated BRL269.1 million in EBITDA and BRL330 million in funds from operations (FFO) in 2008, according to Fitch's methodology. These numbers compare favorably with the EBITDA of BRL93 million, excluding expenses with its initial public offer (IPO) and FFO of BRL71.4 million in 2007, evidencing the company's rapid growth. Cash flow from operations should turn positive only in 2010, following the delivery of great part of the projects launched in 2008.
EBITDA margin of 24.8% in 2008 was above industry average and remained stable compared to 2007. MRV launched a potential sales volume (PSV) of BRL2,533 million in 2008 and pre sales reached BRL1,544 million. Given a scenario of global uncertainty, MRV should be more selective and cautious in the decision of future launchings, which should strongly contract in 2009 compared to 2008. Sales speed was in line with its peers, though the impact of the global credit crisis was noted, as seen by the slowdown in pre sales in the last quarter of 2008. The cancellation of contracts in 2008 was below 6% of sales. However, the downturn of the Brazilian economy should contribute to an increase in cancellations.
MRV has about 30 years of specialization in residential projects for the low-income segment. MRV had a land bank amounting to BRL9 billion of PSV at end 2008, with 94% addressed to units with a price up to BRL130,000. MRV is owned by Rubens Menin Teixeira de Souza (44.6% of total common shares) and MRV's executives (9.7%). The remaining shares (45.7%) are public and traded at Sao Paulo Stock Exchange (Bovespa).
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