Fitch Affirms MRV's Rating at 'AA-(bra)'; Outlook Stable
SAO PAULO -- October 18, 2012
Fitch Ratings has affirmed MRV Engenharia e Participacoes S.A.'s ratings as
--Long-term national scale rating at 'AA-(bra)';
--5th Debentures Issuance, in the amount of BRL500 million, due in 2016, at
--6th Debentures Issuance, in the amount of BRL500 million, due in 2018, at
The Rating Outlook for MRV is Stable.
The ratings reflect MRV's capacity to maintain solid credit metrics, its
conservative financial strategy of preserving strong liquidity to support
business expansion, and low leverage. The classification also considers MRV's
position as one of the largest developers in the Brazilian real estate sector,
the strength of its franchise and its businesses, and the company's efficiency
to preserve adequate operating margins in its projects, despite higher cost
pressure. MRV's longstanding specialization in residential projects for the
low income segment and 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
MRV has the challenge to continue to preserve its operating margins and
improve operational cash generation in an environment of growing pressure on
costs. In addition, the company will also have to adequately manage the
expected increase of project launches and stock in the near term, which should
pressure its working capital needs. MRV also has the challenge of its business
strategy for the low income sector, which is more exposed to the cyclical
nature of the residential construction industry, which is highly correlated
with the local economy and strongly vulnerable to an economic slowdown, higher
unemployment rate and restrictions in lines of credit. The company's strong
dependence on Caixa Economica Federal (Caixa) adds risk to its business.
Conservative Financial Strategy:
The company's financial strategy is conservative and is designed to maintain a
strong cash cushion to underpin the increased number of project launches, to a
potential sales value (PSV) of about BRL5 billion in 2013. As of June 30,
2012, cash and marketable securities was BRL1.564 billion, compared to total
debt of BRL3.490 billion and short-term debt of BRL889 million. Out of total
cash, part was restricted cash, linked to the debentures from Fundo de
Garantia por Tempo de Servico (FGTS) and lines of credit from the Housing
Finance System (SFH). Total cash was sufficient to cover 1.8x short-term debt.
Liquidity is also supported by receivables from completed and sold units of
BRL139 million which are not linked to SFH debt, and benefited from the BRL500
million debentures issued in May 2012.
MRV's debt amortization profile is manageable per Fitch's expectations
regarding liquidity and cash generation. Short-term debt includes BRL307
million of SFH lines of credit and FGTS debentures, with the later secured by
specific mortgages (receivables) of the pre-sold units still under
construction. The SFH lines are paid following the mortgage granting during
the construction phase (Credito Associativ") or the delivery of the unit. MRV
faces BRL391 million of maturing debt in the second half of 2013 and BRL812
million in 2014, of which BRL139 million and BRL418 million, respectively, are
corporate debt maturities. Positively, the participation of corporate debt
relative to the company's total debt is expected to diminish. As of June 30,
2012, corporate debt represented 66% of total debt, compared with 70% in
Net Leverage to Remain Around 2.0x:
MRV's credit metrics remained strong, despite higher debt levels to support
business growth. Leverage, measured by total debt/EBITDA, was 3.5x in the
latest 12 months (LTM) ended June 2012, while the net debt/EBITDA ratio was
1.9x. The company's net debt significantly increased in the past few years, to
BRL1.925 billion in June 2012, compared to BRL1.571 billion in December 2011
and BRL778 million in December 2010, and contributed to higher leverage
ratios. Nevertheless, it remained low compared with its peers. Fitch expects
MRV to preserve its net debt/EBITDA ratio around 2.0x.
Positive Cash Flow from Operations Expected for 2013:
Cash flow from operations (CFFO) should turn positive in 2013, supported by
the receivables that will mature during the year and the high number of
projects expected to be delivered. About BRL5.1 billion of receivables matures
in the next 12 months and BRL7.5 billion within 24 months. MRV generated
BRL991 million in EBITDA and BRL520 million in funds from operations (FFO) in
the LTM ended June 2012, based on Fitch criteria. Although cash burn reduced,
CFFO remained negative at BRL496 million. The high capex plan for LOG
Commercial Properties (LOG CP) could pressure the company's free cash flow in
the next couple of years.
MRV's business model benefits from standardized projects, financed by
appropriate funding sources. The company's operating margins and working
capital needs positively distinguish it from its Brazilian peers in the sector
with its short construction cycle and by good funding availability. The
average price per unit sold for a great part of MRV's projects falls within
the low-income category, which makes them eligible to receive funding from
Caixa. In the first half of 2012, about 89% of pre-sales was financed by a
'credito associativo' line of credit from Caixa and Banco do Brasil. However,
MRV's strong dependence on Caixa adds risk to MRV's business.
Still Adequate Operating Performance:
MRV was able to maintain its adequate historical operational performance,
despite cost pressures. In the LTM ended June 2012, MRV launched BRL4.5
billion of potential sales value (PSV), compared to BRL4.6 billion in 2011.
Sales speed, measured as the total pre-sales gross of cancellations of sales
contracts/supply ratio, reduced to about 19% per quarter during the first half
of 2012, compared to an average of 25% per quarter in 2011 and is a factor to
be monitored by Fitch. The increased level of cancellation of contracts in the
sector is also a concern. As of June 30, 2012, MRV had an inventory with an
estimated market value of BRL4.4 billion, of which 6% is related to concluded
Gains of scale and operational efficiency should contribute to improve MRV's
results. In the LTM ended June 2012, EBITDA margin was 22.9% compared to an
average of 26.3% between 2009 and 2011, due to increased operational and
administrative costs. Fitch expects EBITDA margins of around 23% in 2013,
despite pressure on costs, placing MRV above the average for the sector.
Business Strongly Dependent on the Domestic Economy:
MRV is one of the largest developers in Brazil's real estate industry, with a
strong franchise and solid landbank. The company's business is exposed to
strong competition and to the effects of a significant downturn in the
domestic economy and higher unemployment rates, which could negatively impact
the company's continuity of growth and performance. However, Fitch expects MRV
to continue to benefit, in the short-to-medium term, from the favorable
business environment presented by the residential real estate sector in
Brazil. The sector is also expected to benefit from continued government
support and access to the capital and debt markets.
Potential Rating or Outlook Drivers:
MRV's ratings could be upgraded should there be a consistent improvement in
the operational cash flow generation capacity, coupled with the maintenance of
a strong liquidity position and low leverage. MRV's ratings could be
negatively affected by a more unstable macroeconomic environment, which could
impact the homebuilding sector's fundamentals and pressure the company's
liquidity. In addition, a scenario for a Negative Outlook or downgrade include
an increase in leverage, with a more concentrated debt maturity profile,
strong increase in cancellation of contracts, and difficulties in transferring
the mortgages (receivables) to Caixa and other banks.
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);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria
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