Fitch Downgrades Brookfield Incorporacoes to 'B+/A(bra)'; Outlook Stable
SAO PAULO -- July 2, 2013
Fitch Ratings has downgraded the long-term foreign and local currency Issuer
Default Ratings (IDRs) of Brookfield Incorporacoes S.A. (Brookfield
Incorporacoes) and its full subsidiary Brookfield Sao Paulo Empreendimentos
Imobiliarios S.A. (Brookfield SP) to 'B+' from 'BB-'. Fitch has also
downgraded the companies' long-term national ratings to 'A(bra)' from
In addition, Fitch has withdrawn the ratings of Brookfield SP. The ratings are
no longer considered relevant to the agency's coverage following the
evaluation of the ratings on the basis of Brookfield Incorporacoes'
The Outlook for the corporate ratings is Stable. A full list of rating actions
follows at the end of this press release.
KEY RATING DRIVERS
The downgrades reflect the continued weakening of Brookfield Incorporacoes'
operating results above Fitch's initial expectations. The company's credit
metrics deteriorated considerably in 2012, and Fitch does not expect they will
return to paramaters compatible with the previous ratings in the medium term.
The review process of costs of projects in development and the internal
controls are underway. This makes possible the recognition of new adjustments,
with additional pressure on the operating margins and the company's financial
The positive measures recently adopted by Brookfield Incorporacoes with a view
to recover its operating margins are affected by the long business cycle of
the industry. These measures seek to increase its operational efficiency, the
control and integrated management of project costs, as well as to speed up the
homebuyers transfer to banks and monetize a portion of its long term land
bank. The strong volatility of the real estate industry and its dependence on
favorable macroeconomic conditions were also incorporated in the analysis.
Brookfield Incorporacoes' ratings continue to be supported by its conservative
liquidity position and by integration and support from the controlling
shareholder, Brookfield Asset Management (BAM, IDR 'BBB'), evidenced by the
BRL400 million capital increase in November 2012.
Cost Overruns & Sales Contract Cancellations Impact Credit Ratios
Brookfield Incorporacoes operating results continue to be strongly affected by
costs above budget and by high cancellations of sales contracts. In the latest
12 months (LTM) ended March 2013, the company reported adjusted EBITDA of
BRL102 million and adjusted EBITDA margin of only 3%. These figures compare
with BRL667 million and 18.4% reported in 2011, respectively. This reduction
reflects the negative impact of recognition of additional project costs of
BRL332 million and BRL193 million of cancellations of sales contracts net of
resale. The recovery of operating margins should take longer than initial
expectations, making more difficult the improvement of the company's operating
results, once projects with lower margins are still in the conclusion phase,
and new adjustments may pressure the operating performance.
Leverage Likely to Remain High in 2013
Brookfield Incorporacoes' leverage remains high and is not likely to reduce to
more conservative parameters in the short term. The higher debt volume to
finance its business expansion, combined with the weak generation of EBITDA,
resulted in high net debt/EBITDA ratio of 29.3x in the LTM ended March 2013,
which is well above Fitch's previous expectations. The company's net leverage
should decline to around 5.0x only in 2014, at the proportion that the
operating margins present some recovery. The company reported potential sales
value (PSV) of BRL3 billion in 2010, BRL3.9 billion in 2011 and BRL3.1 billion
The company's total debt was of BRL4 billion at end March 2013 against BRL3.3
billion in 2011. Over the same period, net debt increased to BRL3 billion,
from BRL2.3 billion. This increase reflected the high volume of project
launches and working capital needs.
Liquidity Supports Ratings
The risk of high financial leverage of Brookfield Incorporacoes is mitigated
by its significant cash position and high volume of receivables of ready units
which can be monetized. At March 31, 2013, the company reported cash and
equivalents of BRL954 million for a total debt of BRL4 billion, of which
BRL1.2 billion will mature in the short term and BRL2.1 billion will mature by
the end of 2014. Considering the corporate debt only, the cash and equivalents
corresponded to 136% of the short-term debt. The potential liquidity of
receivables of concluded and sold units not linked to debt was of BRL741
million. Brookfield Incorporacoes also benefits from an adequate access to
capital and debt markets and should continue to be successful in preserving
strong liquidity and lengthening its debt amortization profile.
Cash Flow from Operations Should Remain Negative
Brookfield Incorporacoes operational cash generation should remain negative in
2013. In LTM ended March 2013, the funds from operations (FFO) were negative
BRL439 million, while cash flow from operations (CFFO) was negative BRL836
million. Since 2009, the company has reported negative CFFO due to high
working capital needs to support the business growth. Fitch expects that the
greater volume of project deliveries, from BRL3.5 billion to BRL4 billion of
PSV in 2013, combined with measures to speeding up the transfer of homebuyer
credits to the banks, recover the operational cash generation in 2014.
Still Low SFH Financings
Brookfield Incorporacoes' debt structure remains less conservative due to the
high participation of corporate debt. As of March 31, 2013, the corporate debt
accounted for 64% of the total debt, as the company financed the business
expansion manly with debentures and working capital lines. Fitch expects a
more intense utilization of financings from the Housing Financial System
(SFH), more adequate for the sector, in 2013 and in 2014.
Brookfield Incorporacoes' ratings could be negatively affected by new and
relevant project cost adjustments above expectations that negatively affect
the company's operating margins and leverage. Factors that result in liquidity
reduction or from an unstable environment, that impact the sector fundaments,
could also contribute to a downgrade.
Positive rating actions can be taken by a significant reduction of leverage
ratios, combined with a consistent recovery of operating margins and
achievement of positive and robust operating cash flow from operations and
preservation of strong liquidity.
Fitch has taken the following rating actions:
--Long-term foreign and local currency IDRs downgraded to 'B+' from 'BB-';
--Long Term National Scale rating downgraded to 'A(bra)' from 'A+(bra);
--BRL100 million first debenture issuance due September 2013 downgraded to
'A(bra)' from 'A+(bra);
--BRL366 million second debenture issuance, first series of BRL285 million due
in 2014 and second series of 81 million due in 2016, downgraded to
--BRL300 million third debenture issuance, first series of BRL150 million due
in 2015 and second series of BRL150 million due in 2016, downgraded to
--BRL300 million fourth debenture issuance, first series of BRL76.76 million
maturing 2015 and second series of BRL223.24 million maturing in 2016,
downgraded to 'A(bra)' from 'A+(bra)'.
--Long-term foreign and local currency IDRs downgraded to 'B+' from 'BB-' and
--Long-term National Scale rating downgraded to 'A(bra)' from 'A+(bra)' and
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Corporate Rating Methodology' Aug. 8, 2012);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
National Ratings Criteria
Corporate Rating Methodology
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Jose Roberto Romero, +55-11-4504-2603
Fitch Ratings Brasil Ltda
Alameda Santos, 700 - 7th andar - Sao Paulo - SP - CEP: 01418-100
Fernanda Rezende, +55-21-4503-2619
Ricardo Carvalho, +55-21-4503-2627
Brian Bertsch, +1 212-908-0549
New York, Media Relations
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