Fitch Ratings has upgraded MRV Engenharia e Participa??es S.A.'s (MRV) Long-Term National Scale Corporate Rating to 'AA-(bra)' from 'A+(bra)'. In conjunction with this rating action, Fitch has also upgraded to 'AA-(bra)' from 'A+(bra)' its second debenture issuance, in the amount of BRL100 million due in 2011. The Rating Outlook for the corporate rating is Stable.
The upgrade reflects MRV's ability to maintain solid credit metrics following the challenging macroeconomic conditions in 2009, the company's conservative financial strategy of having a strong liquidity position to support its business growth, and its low leverage. Also factored into the rating is the strength of MRV's business and the company's efficiency in maintaining a sustainable growth of its activities with high margins in its projects. MRV's long standing specialization in residential projects for the low income segment and the good access to appropriate funding sources for the development of its projects also support the company's credit fundamentals. MRV has limited exposure to homebuyer credit risks and has a geographically diversified land bank, and the experienced management team.
Conservative Financial Strategy:
MRV has a comfortable liquidity position. As of June 30, 2010, cash and marketable securities was BRL982 million and total debt was BRL1.4 billion. Liquidity is also supported by receivables from completed and sold units of BRL65 million, which are not linked to SFH debt. Liquidity was strong compared to short term debt of BRL500 million. Short-term debt consists of BRL300 million of SFH lines of credit, which are secure by specific mortgages (receivables) for pre-sold units still under construction. The SFH lines are paid following deliver of the unit and the transfer of mortgage (receivables). MRV faces BRL291 million of maturing debt from July 2011 to June 2012, which is manageable per Fitch's expectations regarding the company's liquidity and cash generation. The company's financial strategy is conservative and is designed to build a strong cash cushion and maintain low corporate debt maturities over the next two years, which should support the growth of project launches to more than BRL5 billion in 2011.
Leverage is Low:
MRV's credit metrics remain robust, despite higher debt levels to support business growth. Leverage, measured by total debt/EBITDA, was 2.3 times (x) in the LTM ended June 2010, while net debt/EBITDA ratio was 0.7x. These ratios compares to 1.6x and 1.1x, respectively, in 2008. If SFH financing is excluded, leverage would reduce to 1.6x and net leverage to 0.1x, low compared to its peers. Fitch expects MRV to preserve net debt/EBITDA ratio, excluding SFH financing, below 0.5x even in a scenario of rapid growth of its activities.
MRV's total debt significantly increased to BRL1.439 billion in June 2010, from BRL429 million in December 2008. The non-SFH debt increased to 72% of total debt in June 2010, compared to 58% in December 2009, as the company issued a BRL520 million debentures in March 2010. Higher debt level is compatible with the growth in the company's operations over the last three years and total debt is expected to further increase in 2010 and 2011, SFH credit lines should increase as a percentage of total debt in 2011.
Cash Flow from Operations Supported by MRV's Business Model:
MRV generated BRL626 million in EBITDA and BRL886 million in funds from operations (FFO) in the LTM ended June 2010, which compares favorably with EBITDA of BRL276 million and FFO of BRL330 million in 2008, evidencing the company's rapid growth. Although cash burn was lower in the LTM ending June 2010, cash flow from operations (CFO) remained negative in BRL249 million and negative BRL790 million in 2008. Cash flow from operations should turn positive in 2011, supported by the receivables that will mature during the year.
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 good 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 (Caixa). About 95% of Caixa's funds are released during the construction phase, which allows MRV to report a cash burn lower than the industry average. However, MRV's strong dependence on Caixa adds risks to its business, as the bureaucratic process may result in delays in the approval process of the projects.
Above-Average Sales Speed and Operating Margins:
MRV was able to maintain its adequate historical operational performance, with above-average sales speed and operating margins, despite a more challenging environment in 2009. In the LTM ended June 2010, MRV launched BRL3,423 million of PSV, up 32% compared to 2009. About 75% of the company's project launches were to the units in the price range from BRL80,000 to BRL130,000 and eligible for SFH financing. The availability of long term credit lines to homebuyers; the high housing deficit, especially in the low income segment; the stimulus from the federal government program and the good momentum of the Brazilian economy contributed to strong demand. In the LTM ended June 2010, pre sales was BRL3.255 billion and sales speed, measured as total pre sales/supply ratio, was 73%. MRV should achieve its objective of launching 40,000 units in 2010 and is expected to continue to grow project launches to more than BRL11 billion in the next couple of years.
Gains of scale and operational efficiency contributed to improve MRV results. Net revenues was BRL2.259 billion in the LTM ended June 2010, compared to BRL1.111 billion in 2008 and BRL384 million in 2007. EBITDA also increased to BRL626 million, from BRL276 million and BRL93 million in the same period, while EBITDA margin improved to 27.7%, from 24.8% and 24.2%. Gain of scale from the increased number of units per project contributed to higher EBITDA margin, as the average size of units per project increased to 260 units during the second quarter of 2010, from 172 in the first half of 2009. Fitch expects MRV to continue to report EBITDA margins above 25%, although some pressure in terms of costs is expected.
Business Growth Strongly Dependent on Domestic Economy:
MRV's ratings also reflect the company's position as one of the largest developer in Brazil's real estate industry, the strength of its franchise, and its solid land bank. MRV should continue to benefit, in the short to medium term, from the large housing deficit in Brazil, the Brazilian government program to stimulate the homebuilding sector and the availability of long term lines of credit. However, MRV's business is exposed to strong competition and 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.
Potential Rating or Outlook Drivers:
MRV's ratings could be upgraded should there be a consistent improvement in the free cash flow generation capacity, coupled with the maintenance of strong liquidity position, low leverage and above average operating margins. MRV's ratings could be negatively affected by a more unstable macroeconomic environment, which may impact the homebuilding sector's fundamentals and pressure the company's liquidity. Factors that could lead to consideration of a Negative Outlook or downgrade include an increase in leverage, with a more concentrated debt maturity profile, operating margins below industry average and a significant reduction in the company's liquidity position.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 13, 2010);
--'National Ratings - Methodology Update' (Dec. 18, 2006).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
National Ratings - Methodology Update
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=305544
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