NEW YORK/MONTERREY--(BUSINESS WIRE)--Fitch Ratings has affirmed Servicios Corporativos Javer, S.A.P.I. de C.V.'s (Javer) ratings as follows:
--Foreign currency Issuer Default Rating (IDR) at 'B';
--Local currency IDR at 'B';
--USD270 million senior unsecured notes at 'B+/RR3'.
The Rating Outlook remains Negative.
The ratings incorporate the recent announcement that Javer and Empresas ICA, S.A.B. de C.V. (ICA) have entered into a definitive agreement to combine their homebuilding assets in Mexico. Javer will acquire the assets and operating liabilities related to 20 affordable housing development projects being developed by ICA through its ViveICA subsidiary in exchange for newly issued shares of stock representing a 23% ownership interest in Javer. The company will also assume MXN600 million of secured debt associated with the acquired developments.
The Negative Outlook reflects the concern that the announced transaction could be negative for Javer's credit quality due to potential deterioration in the company's working capital cycle during the integration process of the acquired developments, and continued declining EBITDA margins.
The ratings continue to reflect Javer's regional market position in northeastern Mexico with a firm leadership presence in the state of Nuevo Leon, its consistent business strategy oriented to the low-income housing segment, and adequate land reserve. The ratings are constrained by Javer's incipient capacity to generate free cash flow (FCF) through the economic cycle and high leverage levels. The 'B+/RR3' ratings of the company's unsecured public debt reflect good recovery prospects in the range of 50%-70% given default.
Positively factored in the ratings, is the company's FCF trend achieved in the last quarters. During the LTM September 2012, the company maintained a sound financial strategy based on conservative growth targets reducing working capital needs and achieving slightly-positive FCF generation with low levels of short-term debt. The company's LTM September 2012 revenues, FCF generation, and FCF margin reached levels of MXN5.4 billion, MXN88 million, and 1.6%, respectively.
The proposed transaction will improve Javer's geographic and asset diversification. Post-acquisition, Javer will consolidate its position as one of the main players in the Mexican homebuilding industry by increasing the numbers of developments to 46 in 11 states nationwide, and reaching annual unit sales of approximately 25 thousand, 7 thousand coming from the acquired developments.
The main credit concern is related to the potential deterioration in the company's working capital cycle due to the integration of the acquired operations that could require additional working capital investments as post transaction the company is expected to increase revenues by approximately 40% during the first year of operations. The company is planning to refinance the MXN600 million debt assumed with the transaction through a term loan during the next few weeks. Eventually Javer will be looking - depending on market conditions - to execute another reopening to add this debt to its USSD270 million secured notes.
The transaction is not expected to add leverage. Javer had MXN3.5 billion of total adjusted debt as of Sept. 30, 2012, it was composed primarily of the USD270 million unsecured notes due in 2021, this amount included the 18% premium the company paid during the last exchange debt offering that occurred in 2011. During the latest 12 months (LTM) ended Sept. 30, 2012, the company generated MXN906 million of EBITDA, with an EBITDA margin of 16.9%. These figures resulted in Javer's total gross leverage, measured by the debt-to-EBITDA ratio, of 3.9x for the LTM September 2012. The transaction will add incremental revenues, EBITDA, and debt of approximately MXN2 billion, MXN232 million, and MXN600 million, respectively. On a pro forma basis, the company's gross leverage is estimated at 3.6x, consolidated revenues around MXN7.5 billion and an EBITDA margin of 15%.
Liquidity and FCF Generation Main Rating Drivers:
The ratings are expected to be driven by the development - during the next quarters - of the company's liquidity, FCF generation, and gross leverage during the process of integrating the acquired developments.
A downgrade could be triggered by a deterioration of the company's credit protection measures and cash position due to weak operational results, deterioration in FCF generation driven by increasing working capital needs, and declining EBITDA margins. Expectations by Fitch of total adjusted debt to EBITDA being consistently at or beyond 4.5x will likely result in a downgrade.
Conversely, stable operational performance reflecting a smoothly integration process of the new acquired developments resulting in FCF from neutral to slightly positive, in addition to the expectation that total adjusted debt to EBITDA will remain below 4.0x over time, while maintaining adequate liquidity and a manageable debt payment schedule, can trigger a revision of the Rating Outlook to Stable.
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);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 13, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers