Fitch Affirms MRV's Rating at 'AA-(bra)'; Outlook Stable
RIO DE JANEIRO -- September 30, 2013
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 2017, at
The Rating Outlook for MRV is Stable.
KEY RATING DRIVERS
The ratings reflect MRV's proved capacity to maintain strong credit metrics in
a more instable business environment and with higher cost pressures. MRV
remains committed to preserve low leverage and healthy liquidity to support
project launches and corporate debt maturities in 2013 and 2014.
The ratings consider MRV's position as one of the largest developers in the
country, the company's longstanding specialization in residential projects for
the low income segment, combined with good access to appropriate funding
sources for the development of its projects and conservative capital
structure. MRV 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) and Banco do Brasil are risk factors of its
The ratings incorporate the expectation that operating margins will gradually
improve, as lower margins projects are delivered. Despite higher level of
cancellation of sales contracts, MRV has been successful in reselling the
units and inventory remains adequate, with 6% related to concluded units. MRV
has the challenge to recover its operating margins in an environment of
growing pressure on costs and preserve positive cash flow generation for a
longer period. The company has limited exposure to homebuyer credit risks and
has a geographically diversified landbank.
Conservative Financial Strategy:
The company's financial strategy is conservative and is designed to maintain a
strong cash cushion, which remained above BRL1.0 billion since 2010. As of
June 30, 2013, cash and marketable securities was BRL1.380 billion, compared
to total debt BRL3.073 billion. MRV's debt amortization profile is manageable
per Fitch's expectations regarding liquidity and cash generation. MRV has
BRL1.5 billion of debt maturing up to December 2014 and BRL624 million in
2015, of which BRL488 million and BRL389 million, respectively, are corporate
debt. Fitch expects MRV to refinance part of debt maturities and corporate
debt is expected to reduce in the medium term.
The participation of corporate debt relative to the company's total debt is
expected to reduce. As of June 30, 2013, Housing Finance System financing
(SFH) and debentures from Fundo de Garantia por Tempo de Servico (FGTS)
totaled BRL1.3 billion (43% of total debt), and are 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 or the delivery of the unit.
Positive Cash Flow from Operations in 2013:
MRV reported positive cash flow from operations (CFFO) during the first half
of 2013, after several years of negative cash flow generation. In the six
months ended June 2013, MRV reported negative funds from operations (FFO) of
BRL135 million and positive CFFO of BRL193 million, compared to negative CFFO
from 2009 to 2012, based on Fitch criteria. Negative FFO in the period
reflects lower advances from customers. Positively, the strong delivery of
projects contributed to stronger CFFO.
Fitch expects CFFO to remain positive in 2013 and 2014, supported by the
receivables that will mature during the year and the high number of projects
expected to be delivered. MRV delivered 26,457 units in 2012 and 14,499 units
in the first half of 2013, and expects to deliver about 32,000 units in 2013.
About BRL6.6 billion of receivables mature up to December 2014.
MRV's business model benefits from standardized projects, financed by
appropriate funding sources. The company's working capital needs positively
distinguish it from its Brazilian peers in the sector with its short
construction cycle and by good funding availability. In the first half of
2013, about 83% of pre-sales was financed by a 'credito associativo' line of
credit from Caixa and Banco do Brasil.
Operating Margins to Gradually Improve:
Operating margins reduced since 2012 as a result of higher construction costs
and increase of unqualified labor to support growth strategy. In the latest 12
months (LTM) ended June 2013, net revenues was BRL4.0 billion, compared to
BRL4.3 billion in 2012 and BRL4.0 billion in 2011. EBITDA and EBITDA margin
were BRL719 million and 17.9% in the LTM ended June 2013, compared to BRL811
million and 19% in 2012, and BRL1.045 billion and 26% in 2011. On a pro forma
basis, considering the EBITDA generation of the subsidiaries/SPEs not
consolidated, net revenues was BRL4.2 billion and EBITDA was BRL731 million,
with an EBITDA margin of 17.4%.
Fitch expects EBITDA margin to gradually recover in the next couple of years
as the company delivers old lower margins projects. However, the company's
cost structure has changed and EBITDA margins are not expected to return to
high historical level.
Net Leverage Expected to Reduce Only in 2014:
MRV's leverage increased and Fitch expects net debt/EBITDA ratio to peak in
2013 and return to levels around 2.0x in 2014. Lower net debt in June 2013 was
due to the new accounting standards for consolidation. In January 2013,
Brazilian companies had to adjust its Financial Statements, and as a result,
some subsidiaries/SPEs are not consolidated anymore and MRV has co-obligation
in part of the debt.
As of June 30, 2013, total debt of companies with joint control was BRL510
million and MRV guaranteed BRL426 million of its subsidiaries corporate debt.
As a result, off balance sheet debt was BRL738 million, of which BRL545
million was corporate debt and BRL193 million was SHF. Based on Fitch's
calculations, on a pro forma basis, considering cash, total debt and EBITDA
generation of the subsidiaries/SPEs not consolidated, total adjusted debt was
BRL3.8 billion, total adjusted debt/adjusted EBITDA was 5.2x and net adjusted
debt/adjusted EBITDA was 3.0x. These ratios compare negatively with an average
of 2.8x and 1.3x, respectively, from 2009 to 2012.
Cancellation of Sales Contracts Increased:
The increased level of cancellation of contracts is a factor to be monitored
by Fitch. MRV reported cancellation of sales contracts of BRL526 million
during the first half of 2013. Despite higher sales cancellation, MRV was able
to resell about 90% of the units during the first half of 2013. Fitch expects
cancellation of sales contracts of about 20% of pre sales in 2013 and 2014.
MRV launched BRL1.4 billion of potential sales value (PSV) during the first
half of 2013, compared to BRL3.4 billion in 2012 and BRL4.6 billion in 2011.
Sales speed, measured as the total pre-sales net of cancellations of sales
contracts/supply ratio, was 16.7% in the first quarter of 2013 and 21.6% in
the second quarter of 2013, compared to an average of 16% per quarter in 2012.
MRV's ratings could be upgraded should there be a consistent improvement in
the operational cash-flow generation capacity for a longer period, coupled
with the recovery of operating margins, leverage reduction and the maintenance
of a strong liquidity position.
MRV's ratings could be negatively affected by an increase in leverage, with a
more concentrated debt maturity profile, weaker operating margins, a strong
increase in cancellation of sales contracts, and difficulties in transferring
the mortgages (receivables) to Caixa and other banks. In addition, a scenario
for a Negative Outlook or downgrade includes a more unstable macroeconomic
environment, which could impact the homebuilding sector's fundamentals and
pressure the company's liquidity.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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