RIO DE JANEIRO--()--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 to its fifth debenture issuance, in the amount of BRL400 million, due in 2015 (1st series of BRL120 million) and 2016 (2nd series of BRL280 million). The Rating Outlook for Cyrela's corporate ratings was revised to Stable from Negative.
The revision of Cyrela's Outlook reflects the company's significant improvement in its free cash flow (FCF) generation, gradual recovery in operating margins, and reduction in its financial leverage. Since the second half of 2011, EBITDA margin started to improve as a result of several initiatives taken by the company. The company still has the challenge to continue to recover its EBITDA margins to levels above 18% in 2013, in line with its historical performance.
During 2012, Cyrela has implemented a more conservative approach in terms of project management and cost controls. In the LTM ended in September 2012, the company's FCF was BRL639 million, which compares with negative FCF levels of BRL139 million and BRL1 billion during 2011 and 2010, respectively. Cash flow generation should continue to benefit from high volume of project deliveries and is expected to remain positive in 2013.
Cyrela's ratings are supported by the company's position as one of the largest developers in Brazil's real estate industry, its conservative financial strategy sustained by a robust liquidity position to support its business growth and the well-distributed corporate debt maturity profile. The ratings also incorporate the strength of its franchise and its solid and diversified landbank. The expectation that Cyrela will continue to generate positive cash flow from operations in 2013 was also considered. The ratings are constrained by the company's moderate leverage and 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.
EBITDA MARGIN TO GRADUALLY RECOVER
Cyrela has implemented several measures to improve profitability. However, positive impacts from these initiatives should be gradually reflected in the results, due to the long cycle of the projects in this sector. In the latest-12-month (LTM) ended September 2012, Cyrela reported adjusted EBITDA (including financial expenses allocated in costs) of BRL1.047 billion and adjusted EBITDA margin of 16.5%, compared to BRL956 million and 15.6%, respectively, in 2011. Cost overruns, project delays and weak site management resulted in a loss of profitability at the end of 2010 and during the first half of 2011. Adjusted EBITDA margin was 18.0% in the third quarter of 2012, compared to 11.8% in the last quarter of 2010.
NET LEVERAGE EXPECTED TO SLIGHTLY IMPROVE
Lower debt and improved EBITDA generation contributed to reduce leverage. In the LTM ended September 2012, total debt/adjusted EBITDA ratio was 4.3x and, in net debt basis, was 2.8x. These ratios compare favorably with 4.9x and 3.0x, respectively, at the end of 2011 and 5.8x and 3.6x in September 2011. Net leverage should further reduce to more conservative levels, of 2.5x by the end of 2013, as EBITDA continues to increase.
CONSERVATIVE FINANCIAL STRATEGY
Cyrela's robust liquidity combined with its lengthened corporate debt maturity profile, strengthens the company's credit measures. As of Sept. 30, 2012, Cyrela reported cash and marketable securities of BRL1.7 billion and total debt of BRL4.5 billion, with BRL1.3 billion due in the short-term and BRL1.1 billion from October 2013 to September 2014. Out of debt maturities in the short-term, BRL247 million are related to corporate debt.
Great 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 1.2x. Cyrela has efficiently managed an adequate debt profile supported by an amortization schedule compatible with its activities, and in great part by credit lines from SFH (Housing Financial System).
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 BRL3.0 billion of receivables that will mature in the next 12 months, net of costs to be incurred.
PROJECT LAUNCHES GROWTH EXPECTED TO RESUME IN 2013
Cyrela faced delays to approve projects in Sao Paulo, which resulted in lower than expected project launches during 2012. In 2011, the company launched a potential sales value (PSV) of BRL6.3 billion and in the nine months ended September 2012 launched only BRL2.5 billion. The company plans to launch BRL5.0 billion in 2012, with high concentration in the last quarter of the year. For 2013, project launches are expected to growth, as a few projects that were expected for 2012 were postponed.
Cyrela has the challenge to reduce its high inventory of concluded units. As of Sept. 30, 2012, total inventory had estimated market value of BRL6.2 million, of which about 15.4% consisted of concluded units and 21.9% will be delivered up to the end of 2013.
POTENTIAL RATING OR OUTLOOK DRIVERS
Cyrela's ratings could be upgraded should there be a consistent improvement in the operational cash flow generation capacity for a consecutive period, coupled with the maintenance of a strong liquidity position and lower 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'. 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);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria