MONTERREY, Mexico & NEW YORK--(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';
--USD320.25 million senior unsecured notes due 2021 at 'B+/RR3';
--USD6.33 million senior unsecured notes due 2014 at 'B+/RR3'.
The Rating Outlook is Stable.
Javer's 'B' ratings reflect a consistent business strategy that is oriented to the affiliated low-income segment, with Infonavit as its main mortgage provider. This strategy has allowed Javer to collect its receivables and manage its working capital needs. The company funding strategy of relying primarily upon long-term public debt with almost no secured debt is also unique for the industry and has led to an 'RR3' rating of its public bonds. Further considered in the company's ratings are its solid cash position, focus on free cash flow (FCF) generation and manageable debt amortization schedule. In Fitch's view, Javer's ratings are constrained by its limited geographic diversification, high financial gross leverage levels, low interest coverage levels and declining margins in the last two years.
KEY RATING DRIVERS:
Higher Leverage and Absolute Debt Levels:
The ratings are limited by the growing trend in the company's gross leverage during past years driven by increasing levels of debt. According to Fitch's calculations Javer's gross leverage was 5.4x as of Dec. 31, 2013, which compares negatively with 4.9x in 2012 and 4.3x in 2011, and with expectations previously incorporated in the ratings. Javer's EBITDA for 2013 was MXN795 million, a 9.3% increase when compared with MXN728 million registered in 2012. Total debt increased to MXN4,272 million at the end of 2013 from MXN3,590 at the end of 2012, due to the issuance of USD50 million in senior notes during 1Q'13 which were intended to be used for acquisitions that did not occur during 2013. The rating affirmation incorporates Javer's capacity to maintain focus on FCF generation, and improving its cash position coupled with its manageable debt maturity profile. Fitch estimates that Javer's gross leverage will be around 5.0x and net leverage will be around 3.8x during 2014, and improve to 4.5x in 2015; deviations from these expectations could result in negative rating actions.
Focus on FCF Expected to Continue in 2014:
Positively factored into Javer's ratings is the company's ability to adjust its business strategy during 2013 to face the industry's challenging operating environment. During 2013, the company increased middle-income and residential housing production, reaching a total of 8,816 units sold in this segment at year end (50.7% of its total units during 2013); this represents an increase of 26% over the 6,998 middle-income and residential units sold in 2012. This strategy was put in place to overcome the lack of subsidies from the federal government in the first months of 2013, which in conjunction with the 145 unit decrease in total units sold, allowed the company to have slightly higher margins and maintain manageable working capital needs to generate a higher positive FCF during 2013 of MXN315 million, compared to the positive FCF of MXN98 million in 2012. FCF calculation considers cash flow from operations less interests paid less capital expenditures. Fitch expects the company's FCF to be negative in 2014, but return to positive in 2015 and 2016.
Limited Geographic Diversification:
Javer's limited geographic diversification constrains its ratings; around 83% in 2013 and 85% in 2012 of Javer's total revenue was generated in the states of Nuevo Leon and Jalisco. This concentration increases the company's dependence upon specific local and municipal governments to secure land and permits, and translates into exposure to individual market dynamics. The company accounts for 16.3% of mortgages granted by Infonavit in Nuevo Leon and 17.7% in Jalisco. This is somewhat mitigated through the company's long-term strategy to overweight the affiliated affordable entry-level segment with Infonavit as its main mortgage provider, because this segment usually presents more demand and government support programs in the form of subsidies. This strategy has allowed Javer to have a shorter working capital cycle.
Low Refinance Risk:
Javer has a manageable debt payment schedule with no material debt maturities during the next few years. Javer's cash position as of Dec. 31, 2013 was MXN1,309 million. This was an increase from MXN417 as of Dec. 31, 2012, due to the reopening of the notes during the 1Q'13. The company issued USD50 million to repay ViveICA's short-term debt, but the agreement to merge ICA's housing business with Javer was terminated, due to both parties' lack of agreement on conditions for closing the transaction. The company does not factor in any of its account receivables embedded in its cash position. Javer's debt of MXN4.3 billion consists primarily of its USD320.25 million (MXN4.1 billion) senior unsecured notes due in 2021. Javer's remaining debt balance consists of the USD6.33 million notes due in 2014 and capital leases. Debt payments due in 2014 and 2015 are approximately MXN111.7 million and MXN16.3 million, respectively.
Declining Margins and Low Interest Coverage:
Javer's EBITDA margins have declined during the last two years reaching 14.7% and 14.3% during 2013 and 2012, respectively, compared to the average of 21.2% during 2008-2011. This margin compression reflects deterioration in the business environment during 2012 and 2013 in terms of limited government-subsidy availability in the company's area of operations, as well as its strategic decision to increase the size of its labor force because of the expected merger with ViveICA; as the combination did not take place, a human resources downsizing translated to termination costs that increased Javer's SG&A in 2013. This situation is not expected to continue in 2014; the ratings incorporate the expectation that the company's EBITDA margin will remain at around 14.5% during 2014 as a result of Javer's strategy of increased production of affordable entry-level housing, which traditionally carries lower margins. Javer's interest coverage levels are low with ratios around 1.5x. According to Fitch's calculations, the funds from operations (FFO) interest coverage ratio was 1.4x at the end of 2013 and 1.1x at the end of 2012. EBITDA/gross interest expense was 1.5x at the end of 2013 and 1.4x at the end of 2012.
Stable Business Position, Adequate Land Reserves:
Javer was the second-largest supplier of Infonavit homes in the country at year end 2013. The company is also the largest supplier of Infonavit loans in the states of Nuevo Leon and Jalisco with a 16.3% and 17.7% market share, respectively. Javer's land reserves were equivalent to 94,061 homes as of Dec. 31, 2013, which represents about five years of production. Around 45% of Javer's land reserves are inside the urban perimeters established by the new Urban Development and Housing Policy and the rest are land reserves with infrastructure and/or housing already on them already authorized to operate as housing developments. The split of these reserves between owned land reserves and land reserves through land trust agreements is approximately 63%/37%. Javer's strategy is to invest approximately MXN500 million per year in land reserves replacement.
A negative rating action could be triggered by further deterioration in the company's credit protection measures and cash position due to weak operational results and/or capex levels substantially above expectations, deterioration in FCF generation driven by increasing working capital needs, and continued decline in EBITDA margins. Total debt-to-EBITDA consistently above 5.0x in 2014 and 4.5x in 2015 will also pressure Javer ratings.
Conversely, a positive rating action could be triggered by a combination of the following factors: material improvement in FCF generation resulting in consistently positive FCF levels, stable operational performance, and significant strengthening in the company's leverage and interest coverage metrics.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 19, 2013).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage