NEW YORK & MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed Servicios Corporativos Javer, S.A.P.I. de C.V.'s (Javer) ratings as follows:
--Foreign Currency Issuer Default Rating (IDR) at 'B';
--Local Currency IDR at 'B';
--USD270 million senior unsecured notes at 'B+/RR3'.
The Rating Outlook has been revised to Negative from Stable.
The Negative Outlook reflects the company's increasing leverage during the latest 12 months (LTM) ended September 2011, which is not in line with Fitch's expectations previously incorporated in the ratings. It also reflects Fitch's concern regarding the company's negative free cash trend that could result in further leverage and liquidity deterioration during 2012 at levels considered not in line with the rating category.
A negative rating action could be triggered by a deterioration of the company's credit protection measures and cash position due to weak operational results, a decline of government funding programs, and deterioration in the company's industry business environment leading to erosion in the company's market position. Expectations by Fitch of total adjusted debt to EBITDA being consistently at or beyond 4.5 times(x) will likely result in a downgrade. Conversely, better operational performance resulting in the expectation that total adjusted debt to EBITDA will remain below 4.0x over time, can trigger a revision of the Rating Outlook to Stable.
The ratings continue to reflect Javer's solid regional market position in northeastern Mexico with a firm leadership presence in the state of Nuevo Leon, its sustainable business strategy oriented to the low-income housing segment, its significant land reserve, and relatively adequate liquidity position. The ratings are constrained by Javer's leverage, limited geographic diversification, declining liquidity, and limited capacity to generate free cash flow.
The 'B+/RR3' ratings of the company's unsecured public debt reflect good recovery prospects in the range of 50%-70% given default.
Limited Geographic Diversification
Javer's operations in the state of Nuevo Leon represent about 75% of its unit sales. This concentration increases the company's dependence upon specific local and municipal governments to secure land and permits. Positively, the company accounts for about 16% of the mortgages granted by Instituto del Fondo Nacional para la Vivienda de los Trabajadores (Infonavit) in Nuevo Leon.
Recovery in Operational Results a Positive
Javer's operations recovered for the LTM ended September 2011; during this time period, the company sold 18,371 units. This level of sales represents an increase of 39.5% versus the same period of the prior year. Javer's 2011 units sold are expected to be around 17,000, which implies unit sales of 6,000 during the fourth quarter of 2011. The company's 2011 EBITDA and the EBITDA margin are expected to be around MXN1 billion and 19%, respectively.
Manageable Debt Payment Schedule
The company has no significant debt payments due during the next two years. During the second quarter of 2011, the company completed an exchange offering for its USD210 million notes due in 2014 for USD270 million of new notes due in 2021. The new notes include an 18% premium paid for the amount exchanged. The premium amount was approximately USD36.6 million (MXN506 million). Javer's total adjusted debt was MXN3.7 billion at the end of September 2011.
Negative Free Cash Flow Generation and Declining Liquidity
For the LTM ended Sept. 30, 2011, Javer's free cash flow (FCF) was negative MXN455 million. The FCF calculation for the period includes cash flow from operations after interest paid (cash flow from operations [CFFO] of negative MXN431 million) minus Capex of MXN24 million. The negative FCF during the period was covered primarily with incremental debt and the company's own cash, which declined from MXN491 million to MXN340 million between Sept. 30, 2010 and Sept. 30, 2011, respectively.
Negative Free Cash and Increase in Financial Leverage Expected in 2012
The company's FCF is expected to remain negative during 2012. Fitch's base scenario considers Javer's 2012 units sold would be around 20,000 units, which should result in negative FCF driven by higher working capital needs. Fitch expects the company will need to cover its working capital needs with incremental debt.
Javer had MXN3.7 billion of total adjusted debt as of Sept. 30, 2011. During the LTM ended Sept. 30, 2011, the company generated MXN974 million of EBITDA. These figures result in a total adjusted debt-to-EBITDA ratio of 3.8 times (x) for the LTM. The ratings incorporate an expectation that Javer's leverage will remain at levels around 4.0x during 2012.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011)
-- 'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
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