NEW YORK & MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned an expected 'BB-(exp)' rating to Urbi Desarrollos Urbanos; S.A.B. de C.V.'s (Urbi) proposed senior notes. The final amount and tenor of the issuance will depend on market conditions. Proceeds from the proposed issuance will be used entirely to refinance debt.
Fitch currently rates Urbi as follows:
--Foreign Currency Issuer Default Rating (IDR) 'BB-';
--Local Currency IDR 'BB-';
--National Long-term rating 'A-(Mex)';
--USD150 million senior notes due 2016 'BB-';
--USD300 million senior notes due 2020 'BB-';
--MXN600 million Certificados Bursatiles due 2014 'A-(Mex)';
--Short-term rating 'F2(Mex)'.
The Rating Outlook is Stable.
The ratings reflect the company's solid market position in the Mexican Homebuilding industry, business strategy oriented to the low-income segment, important land reserve, adequate liquidity, and moderate leverage. The ratings also incorporate the company's limited capacity to generate positive free cash flow in the short and medium term due to increasing working capital needs as the business continues to grow.
The Stable Outlook incorporates the view that Urbi's credit profile will remain stable reflected in the company's gross leverage remaining around 3 times (x), cash position above MXN4 billion, and EBITDA margin around 27.0% in the short and medium term.
Fitch believes a positive rating action could be triggered by a combination of the following factors: improving free cash flow (FCF) generation trending consistently to positive levels and resulting in a significant decrease in the company's gross leverage coupled with solid liquidity. Conversely, a negative rating action could be triggered by a combination of the following: continued negative FCF trend resulting in the increase of the company's gross leverage consistently above current levels of 3.0x, sizable acquisitions of housing projects in progress (HPPs) negatively affecting the company's liquidity by increasing short-term debt or weakening its cash position, decline of government funding programs, and deterioration in the company's market position.
Urbi's market position is solid and sustainable in the medium term based on the company's large scale. The company is the third largest homebuilder in Mexico in terms of number of units sold. Urbi's units sold for the latest 12 months (LTM) ended September 2011 was 35,813, an increase of 6.7% over LTM September 2010. The ratings factor in the view that the company's total units sold for fiscal year (FY) 2011 and FY2012 would be around 39,000 units and 45,000 units, respectively.
Urbi's ratings are constrained by the higher working capital requirements incorporated in its business model. A factor that differentiates the company's business strategy from other participants is Urbi's continued efforts, during the last several years, to develop Mexico's non-affiliated low-income housing market (informal sector) through mechanisms such Alternativa Urbi. This mechanism offers very good growth opportunities but at the same time, financially, represents a challenge, since developing a solid market position in the non-affiliated segment requires a higher level of working capital because the company has to nurture potential buyers until they are qualified to obtain a mortgage.
Urbi's growth strategy has been more aggressive since the second half of 2010 which has resulted in the company's total debt increase to cover higher working capital requirements related to operations as well as to finance the integration of HPPs. The company's total debt increased approximately 53% during the last 15 months to MXN14.1 billion by the end of September 2011 from MXN9.2 billion by the end of June 2010.
Urbi's cash flow generation, measured by EBITDA was MXN4.4 billion during LTM September 2011, representing an increase of 10.2% over the same period ended in September 2010. The company's gross leverage was 3.2x by the end of September 2011, which compares negatively with 2.7x by the end of September 2010.
The company's FCF is expected to be negative for 2011, as the business continues to grow with an anticipated increase in revenues of around 10%-12% during 2011. The company's FCF during LTM September 2011 was negative MXN2.8 billion. Fitch's FCF calculation considers cash flow from operations after interest paid less capex and distributed dividends. Driving the company's FCF trend is the increase in working capital needs which started during the second half of 2010 as the company increased its levels of account receivables (ARs) from MXN531 million in December 2009 to MXN3.6 billion and MXN7.1 billion by September 2010 and September 2011, respectively.
Expected improvement in the company's liquidity post-issuance is also positively incorporated. The company's liquidity, measured by the cash to short-term debt ratio, has weakened during LTM September 2011 but it is anticipated to improve with the proposed transaction. During the LTM September 2011, Urbi maintained a stable cash position reaching levels of MXN5.7 billion and MXN6.9 billion by the end of September 2010 and September 2011, respectively. However, the company's short-term debt during the same period increased from MXN1.7 billion to MXN6.9 billion as the company funded HPP acquisitions with short-term debt. With the proposed transaction the company should gain financial flexibility by reducing its short-term debt position and improving its debt maturity schedule. In addition, the ratings consider that Urbi will maintain a strong cash position of between MXN4 billion and MXN5 billion 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);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
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