Fitch Affirms Cyrela's IDR at 'BB'; Outlook Stable
RIO DE JANEIRO -- December 19, 2013
Fitch Ratings has affirmed Cyrela Brazil Realty S.A. Empreendimentos e
Participacoes' (Cyrela) foreign and local currency Issuer Default Ratings
(IDR) at 'BB' and long-term national scale at 'AA-(bra)'. Fitch has also
affirmed the 'AA-(bra)' national long-term rating for Cyrela's fifth debenture
issuance, in the amount of BRL400 million, due in 2015. The Rating Outlook for
Cyrela's corporate ratings is Stable.
Cyrela's ratings reflect the company's conservative financial strategy
sustained by a strong liquidity position to support its business growth and
the well-distributed corporate debt maturity profile. The company's adequate
capital structure, with great part of total debt composed by credit lines from
SFH (Housing Financial System), compatible with its activities, was also
considered. The important recovery in operating margins and the expectation
that Cyrela will continue to generate positive cash flow from operations in
2014 and 2015 due to high volume of project deliveries strengthens the
company's credit measures.
Cyrela's credit profile is also supported by the company's position as one of
the largest developers in Brazil's real estate industry, the strength of its
franchise and its solid and diversified landbank. The ratings are constrained
by the expectation that inventory of finished units should remain high and by
the exposure of its business to the cyclicality of the homebuilding industry,
which is highly correlated to the local economy and strongly vulnerable to an
economic slowdown and to restrictions of lines of credit.
KEY RATING DRIVERS
Operating Margins Recovered
Cyrela has efficiently implemented its turnaround operating strategy. Fitch
views positively the company's operations with great part of the projects to
the middle and high income segments, which are less susceptible to adverse
macroeconomic conditions compared to the economic segment, as well as the
reduction of partnerships that proved to be more difficult to control and with
lower profitability. In the LTM ended September 2013, EBITDA was BRL1.3
billion (excluding financial expenses allocated in costs) and EBITDA margin
was 24.6%. The margin was above the average of the sector and compares
favorably with 20.7% in 2012 and 17.7% in 2011. The legacy of lower margin
projects should continue to impact EBITDA margins in 2014, which is expected
to gradually improve throughout 2015.
Conservative Financial Strategy
Cyrela's strong liquidity combined with its lengthened corporate debt maturity
profile, strengthens the company's credit measures. As of September 30, 2013,
cash and marketable securities was BRL1.6 billion and total debt was BRL3.9
billion, with BR894 million due up the end of 2014 and BRL980 million in 2015.
Out of debt maturities, BRL428 million and BRL212 million, respectively, are
related to corporate debt. Recently, Cyrela concluded the issuance of about
BRL400 million of debt to extend debt maturities.
A significant part of Cyrela's cash position is related to restricted cash, to
finance construction costs. Cyrela's liquidity resulted in cash/short-term
debt ratio of 1.8x. The company also benefits from the potential liquidity
supported by approximately BRL1.0 billion of receivables from completed and
sold units not linked to debt and about BRL5.4 billion of receivables that
will mature in the next 24 months, net of costs to be incurred.
Positive Cash Flow Generation
Free cash flow (FCF) should continue to benefit from high volume of project
deliveries and is expected to remain positive in the next couple of years.
Cyrela expects to deliver about 20 thousand to 25 thousand units in 2013 and
25 thousand to 30 thousand in 2014. In the LTM ended in September 2013, the
company generated funds from operations (FFO) of BRL1.1 billion and cash flow
from operations (CFFO) of BRL766 million. These numbers compare positively
with BRL678 million and BRL167 million, respectively, reported in 2011. This
improvement was a result of lower cash burn and strong cash inflows during the
phase of conclusion of the projects. In the LTM ended in September 2013, the
company's FCF was BRL413 million.
Net Leverage To Remain Low
Fitch projects Cyrela's net leverage to remain at conservative levels, due to
the expectation of continued strengthening of its operational cash generation.
In the LTM ended September 2013, the total debt/adjusted EBITDA ratio was 2.9x
and, in net debt basis, was 1.7x. These ratios compare favorably with 3.5x and
2.0x, respectively, at the end of 2012, and to an average of 3.8x and 2.3x
from 2010 to 2012.
In January 2013, Brazilian companies had to adjust its financial statements
due to the new accounting standards for consolidation, and as a result, some
subsidiaries/SPEs are not consolidated anymore. As of September 30, 2013,
total debt of companies with joint control was BRL151 million, composed of SHF
lines. Based on Fitch's calculations, on a pro forma basis, total
debt/adjusted EBITDA ratio would increase to 3.0x and the net debt basis to
High Finished Inventory
Cyrela still has the challenge to reduce its high inventory of finished units.
As of September 30, 2013, total inventory had estimated market value of BRL6.2
billion and about 15.0% consisted of concluded units. Fitch does not expect a
significant reduction of finished inventory in the short term, as 36.2% of
total inventory (about BRL2.2 billion) of units under construction will be
delivered up to the end of 2014 and part of the company's inventory is located
in cities with oversupply. In the LTM ended September 2013, the company
launched a potential sales value (PSV) of BRL2.7 billion and BRL3.9 billion in
Cyrela's ratings could be upgraded should there be a consistent improvement in
the operational capacity for cash flow generation for a consecutive period,
coupled with a significant reduction of finished inventory, the maintenance of
a strong liquidity position and low leverage.
A significant reduction in the company's operating margins, lower liquidity
position, a more concentrated corporate debt maturity profile, or a more
unstable macroeconomic environment could also impact the company and the
homebuilding sector's fundamentals and result in a downgrade.
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 - Effective from 8 August 2012 - 5 August 2013
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