Breaking News

Nomura, MUFJ-MS, Goldman, JPMorgan to Lead Japan Post IPO
Tweet TWEET

Fitch Downgrades Brookfield Incorporacoes to 'B'/'BBB+(bra)'; Outlook Stable

  Fitch Downgrades Brookfield Incorporacoes to 'B'/'BBB+(bra)'; Outlook Stable

Business Wire

SAO PAULO -- April 3, 2014

Fitch Ratings has downgraded the long-term foreign and local currency Issuer
Default Ratings (IDRs) of Brookfield Incorporacoes S.A. (Brookfield
Incorporacoes) to 'B', from 'B+', as well as the long-term national rating to
'BBB+(bra)' from 'A(bra)'. The Rating Outlook for the corporate ratings is
Stable. The full list of rating actions is at the bottom of this press
release.

KEY RATING DRIVERS

The ratings downgrade reflects the continued and sharp weakening of Brookfield
Incorporacoes' credit metrics. The company remains showing high cash
consumption, which implies an increased pressure for refinancing of its
corporate debt maturing in 2014 and 2015. The company's operating result
further deteriorated during 2013 and Fitch expects a final result for the year
well below Fitch's initial projections. Relevant volumes of cost adjustments
and high sales cancellations remain negatively pressuring the company's
operating margins, as the losses arising from the review process of costs of
projects under development and internal controls have been greater than
initial expectations, thus generating greater uncertainties.

The Stable Outlook considers as important Fitch's assumption that measures of
financial re-equilibrium, to strengthen the company's capital structure on a
sustainable manner, are necessary and therefore potentially should be
implemented by the company within a period of six months. It also considers a
gradual recovery of the company's operating results in the medium term, to
levels nearer the industry average. Frustrations regarding these assumptions
should result in new downgrading pressure.

Brookfield Incorporacoes' ratings continue supported by the integration and
support from the controlling shareholder, Brookfield Asset Management (BAM,
IDR 'BBB'), evidenced by the BRL400 million capital increase in November 2012,
and by the recent announcement of a public offer for acquisition of the shares
in circulation in the market for the cancellation of its registration as a
public company. On an individual basis, without the support and integration of
the company's business with the controlling group, Brookfield Incorporacoes'
ratings would be lower in more than one notch.

High Corporate Debt Maturities in 2014 and 2015

Brookfield Incorporacoes' liquidity is pressured by high corporate debt
maturities. At Sept. 30, 2013, the company reported cash and equivalents of
BRL950 million for a total debt of BRL4.0 billion, of which BRL1.6 billion
maturing up to end 2014 and BRL1.8 billion up to end 2015. The obligations
with corporate debt were BRL814 million and BRL1.2 billion, respectively. The
company benefits from the potential liquidity of receivables of concluded and
sold units not linked to debt amounting to BRL596 million. A potential
capitalization or partial monetization of its long term land bank is
fundamental to strengthen its cash reserve and reduce debt refinancing
pressures.

Leverage Should Remain High in the Short Term

Brookfield Incorporacoes' leverage remains high and should not reduce to
conservative levels in the short term. The weak EBITDA generation resulted in
high net debt/EBITDA ratio of 50.3x in the LTM ended September 2013, well
above Fitch's expectations and industry peers. The recovery of EBITDA margin,
slower than initial expectations, should contribute to maintain high leverage
in 2014.

When analyzed under cash flow basis the company also remains highly leveraged.
The ratio total receivables on the balance sheet plus total inventory plus
revenue to be booked over net debt plus acquisition of property for
development plus cost to be incurred of units sold also weakened, reaching
1.6x in September 2013, against 1.9x in December 2012 and 2.4x in December
2010.

Recovery of Operating Cash Generation in 2014

In LTM ended September 2013, Brookfield Incorporacoes reported adjusted EBITDA
of BRL80 million. Funds from operations (FFO) were negative BRL322 million and
cash flow from operations (CFFO) negative BRL366 million, which have been
pressured by the company's low operating margins and high interest expense of
its debt. Since 2009, the company has reported negative CFFO due to high
working capital needs to support the business growth. The low EBITDA reflects
the negative impact of the recognition of additional project costs of BRL207
million and BRL590 million of sales cancellations.

Fitch expects that the combination of a greater volume of project deliveries
in 2013 and 2014, with the reduction of project launches in 2013, and with
measures to increase sales speed, measured by pre sales net of sales
cancellations over supply, and the transfer of homebuyer credits to banks,
contribute for a recovery of operating cash generation in 2014 and mainly in
2015. The company's cash flow should benefit from around BRL4.1 billion of
receivables maturing up to end 2014 and BRL2.0 billion in 2015. Despite an
expected higher volume of cash inflows in 2014, it does not appear
sufficiently robust to sustain a high volume of corporate debt maturing over
the next 15 months and, at the same time, finance the cash needs for the
company's growth.

Weak Operating Performance

Brookfield Incorporacoes operating results continue to be strongly affected by
costs above budget and by high volume of cancellations of sales contracts. The
company's sales speed remains weak and below market average. The average ratio
pre sales net of sales cancellations/supply was of 14% by quarter, from
January to September 2013, compared with an average of 19% by quarter in 2012.
This reduction reflects the high volume of sales cancellations of BRl492
million in the first nine months of 2013 and BRL423 million in 2012, which was
partially mitigated by the resale of units object of sales cancellations. From
January to September 2013, around 60% of the units object of sales
cancellations were resold and the inventory of concluded units represented 12%
of the total inventory in September 2013.

Brookfield Incorporacoes has adopted a series of measures to recover its
operational efficiency. However, lower margin projects are still in the
conclusion phase and continue to pressure its results. The company's strategy
focuses on cash generation, sales speed and transfer of homebuyer's credits to
banks, which Fitch considers positive for the current moment of the company,
despite the negative impact on its operating margins. The recovery of these
margins should be gradual given the industry long cycle, but they should
remain pressured by potential cost adjustments and sales cancellations in the
short term. In the LTM ended September 2013, the company reported adjusted
EBITDA margin of only 2.3%.

RATING SENSITIVITIES

The ratings of Brookfield Incorporacoes can be negatively affected by
continued cash consumption by the company, and by the maintenance of operating
margins at current levels over the next 18 months. Frustrations regarding an
improvement of the company's capital structure over the next six months can
pressure the ratings. Positive rating actions are not expected in the short
term.

Fitch has taken the following rating actions:

Brookfield Incorporacoes

--Long-term foreign and local currency IDRs downgraded to 'B' from 'B+';

--Long-term national rating downgraded to 'BBB+(bra)' from 'A(bra);

--BRL366 million second debenture issuance, final maturity in 2016, downgraded
to 'BBB+(bra)'from 'A(bra);

--BRL300 million third debenture issuance, final maturity in 2016, downgraded
to 'BBB+(bra)'from 'A(bra)';

--BRL300 million fourth debenture issuance, final maturity in 2016, downgraded
to 'BBB+(bra)' from 'A(bra)'.

--BRL300 million third debenture issuance, first series of BRL150 million due
in 2015, downgraded to 'BBB+(bra)' from 'A(bra);

--BRL300 million fourth debenture issuance, first series of BRL76.76 million
maturing 2015 downgraded to 'BBB+(bra)'from 'A(bra)'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research

--'Corporate Rating Methodology' - Aug. 05, 2013;

--'National Ratings Criteria' - Oct. 30, 2013.

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826165

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.

Contact:

Fitch Ratings
Primary Analyst
Jose Roberto Romero, +55-11-4504-2603
Director
Fitch Ratings Brasil Ltda
Alameda Santos, 700 - 7 andar - Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst
Fernanda Rezende, +55-21-4503-2619
Director
or
Committee Chairperson
Ricardo Carvalho, +55-21-4503-2627
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com
 
Press spacebar to pause and continue. Press esc to stop.