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 due 2021 at 'B+/RR3';
--USD6.3 million senior unsecured notes due 2014 at 'B+/RR3'.
In addition, Fitch has removed Javer's ratings from Rating Watch Negative and assigned a Stable Rating Outlook.
Javer has announced the reopening of its notes due 2021. The reopening will carry the same rating as the original deal of 'B+/RR3'. Proceeds from the add-on issuance of up to USD50 million will be used to refinance the existing debt of ViveICA, a housing development that the company is acquiring.
Fitch Ratings has removed Javer's ratings from Rating Watch Negative and has assigned a Rating Outlook of Stable.
The change in Javer's Rating Outlook to Stable reflects the company's successful management of its working capital during 2012, a difficult time for an industry that was transitioning to the Mexican government's new vertical housing initiative. Javer's working capital management allowed the company to generate MXN211 million of positive free cash flow (FCF) during 2012. The company's land bank is considered to be strong for the 'B' category with 85% of its land bank qualifying as S1 or S2, and 99% qualifying as S1, S2 and S3.
The ratings of the leading Mexican homebuilders, Javer, Urbi Desarrollos Urbanos, S.A.B. de C.V. (URBI), Desarrolladora Homex, S.A.B de C.V. (Homex) and Corporacion GEO, S.A. de C.V.(GEO), were all placed on Rating Watch Negative on Feb. 22, 2013. The ratings of Geo and Homex remain on Rating Watch Negative due to their very weak performance during 2012 which was marked by very negative cash flow trends. The Rating Watch for these homebuilders is expected to be resolved within the next six months. Key credit considerations will include: the ability of these companies to turn around their operations and the verification of the suitability of their existing land banks for subsidies under future government programs. Fitch downgraded URBI to 'CCC' on March 1, 2013.
In Fitch's view, Javer's limited geographic diversification constrains its ratings at 'B'. Other limitations include its modest FCF generation through the economic cycle, high financial gross leverage levels, and the integration risk related to additional working capital needs associated with the acquisition of ViveICA. The ratings also consider the increasing competition from used homes, limited sources of liquidity for the industry, and the industry's near-term challenging business environment, which is a result of the government's transition to a housing policy that promotes vertical housing in urban areas.
Positively, Javer's 'B' ratings reflect its consistent business strategy that is oriented to the affiliated low-income segment, with Infonavit as its main mortgage provider. This strategy has allowed Javer to collect its receivables and manage its working capital needs. The company funding strategy of relying primarily upon long-term public debt with almost no secured debt is also unique for the industry and has led to an 'RR3' rating of its public bonds. Further considered in the company's ratings are its healthy cash position and manageable debt amortization schedule.
KEY RATING DRIVERS:
Positive FCF in 2012:
Positively factored into Javer's ratings is the company's capacity to adjust its business strategy during 2012 to face the industry's challenging operating environment. During 2012, the company adjusted down its initial 2012 annual target of units sold from between 20,000 and 21,000 units to end the year with total units sold of 17,533, a 7.3% increase over 16,339 total units sold in 2011. This strategy of limiting growth allowed the company to maintain manageable working capital needs and achieve a slightly positive FCF during 2012 of MXN211 million, reversing the negative trend of the last two prior years when the company's FCF was negative MXN390 million in 2011 and MXN586 million in 2010. FCF calculation considers cash flow from operations less interest paid less capital expenditures. The company's FCF is expected to be neutral to mildly positive in 2013.
Comfortable Liquidity Profile, No Short-term Debt:
Javer has a manageable debt payment schedule with no material debt maturities during the upcoming years. Javer's cash position as of Dec. 31, 2012 was MXN417 million. This level of cash remains relatively unchanged from MXN416 as of Dec. 31, 2011. The company does not maintain any factoring of its account receivables embedded in its cash position. The ratings reflect the expectation that the company's cash position will remain relatively stable at around MXN400 million during 2013. Javer's debt of MXN3.6 billion consists primarily of its USD270 million (MXN2.62 billion) senior unsecured notes due in 2021. During the second quarter of 2011, the company completed an exchange offering, which includes an 18% premium paid during the company's exchange offering completed in mid-2011. The premium amount is approximately USD36.6 million (MXN476 million). Javer's remaining debt balance is primarily composed of capital leases. Debt payments due in 2013 and 2014 are approximately MXN50.8 million and MXN103 million, respectively.
Declining Margins:
Javer's EBITDA margins have declined during the last two years reaching 19% and 14.3% during 2011 and 2012, respectively. This margin compression reflects deterioration in the business environment during 2012 in terms of limited government subsidy availability in the company's area of operations, as well as its strategic decision of moving its product mix toward the lower end of the low-income segments, where demand presents better prospects but margins per unit are lower. This situation is not expected to materially change in 2013; the ratings incorporate the expectation that the company's EBITDA margin will remain stable at around 15% during 2013.
Higher Relative and Absolute Debt Levels:
The ratings are constrained by the growing trend in the company's gross leverage during past few years, which reflects deterioration in the company's EBITDA levels coupled with higher levels of absolute debt. Javer's gross leverage was 4.9x as of Dec. 31, 2012, which compares negatively with its gross leverage ratios of 4.3x in 2011 and 3.0x in 2010. Javer's EBITDA for 2012 was MXN728 million, a 19% decline when compared with its EBITDA levels of MXN902million in 2011. On a pro forma basis considering the proposed reopening and the incremental EBITDA coming from housing developments being acquired, Javer's gross leverage is estimated at 4.4x. The ratings incorporate the expectation that Javer's gross leverage will be around 4.5x during 2013.
Potential Increase in Working Capital Needs:
The ratings incorporate the announced agreement between Javer and Empresas ICA, S.A.B. de C.V. (ICA) to combine their homebuilding assets in Mexico. Javer will acquire the assets and operating liabilities related to 20 affordable housing development projects being developed by ICA through its ViveICA subsidiary in exchange for newly issued shares of stock representing a 23% ownership interest in Javer. The developments being incorporated represent annual sales of approximately MXN2 billion with an EBITDA margin around 11%. Javer is also assuming MXN600 million of secured debt associated with the acquired developments, which is expected to be refinanced with the USD50 million proposed reopening (approximately MXN650 million incremental debt). The acquisition is not adding leverage to Javer as it implies a gross financial leverage of 2.8x.
Post-acquisition, Javer will consolidate its position as one of the main players in the Mexican homebuilding industry by increasing the numbers of developments to 46 in 11 states nationwide, and reaching annual unit sales of approximately 25,000 units, 7,000 units coming from the acquired developments. The main credit concern is related to the potential deterioration in the company's working capital cycle due to the integration of the acquired operations that could require additional working capital investments, as post transaction the company is expected to increase revenues by approximately 40% during the first year of operations.
RATING SENSITIVITIES:
The ratings are expected to be driven during 2013 by developments in the company's liquidity position, the level of FCF generation, and the gross leverage that results from integrating ViveICA.
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, deterioration in FCF generation driven by increasing working capital needs, and continued decline in EBITDA margins. Failure to complete the proposed reopening resulting in covering the incremental debt with secured debt will be viewed negatively in terms of recovery prospects for the company's unsecured public debt and could result in a negative rating action.
Conversely, a positive rating action could be triggered by a combination of the following factors: material improvement in FCF generation resulting in consistently positive FCF levels, stable operational performance reflecting a smooth integration process of the new acquired developments, and significant enhancement in the company's liquidity and leverage metrics.
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. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 13, 2012);
--'2013 Outlook: Mexican Homebuilders', Dec.19, 2012;
--'Fitch Places Mexican Homebuilders on Rating Watch Negative', Feb. 22, 2012.
Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773
2013 Outlook: Mexican Homebuilders
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696675
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