CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Los Portales S.A.'s (LP) local and foreign currency long-term Issuer Default Ratings (IDRs) at 'B+'. The Rating Outlook has been revised to Negative from Stable.
The Negative Outlook reflects Los Portales weaker than expected liquidity position, which is a result of the company's inability to complete its debt refinancing during 2014. Successful execution of its refinancing plan during the next six to 12 months would likely result in the outlook being revised to Stable.
The ratings factor in LP's business position, stable margins, moderate leverage, and weak liquidity position. Further factored into the ratings are LP's position as the main land developer in Peru. The company's operations also include parking lots, hotel management, and mid-income and low-income housing development.
Negatively factored in the ratings is LP's limited business diversification. The company is highly dependent on its real estate sales and non-mortgage financing business segments, which represent 49% and 37%, respectively, of 2014 LP's total adjusted EBITDA. In addition, through a joint venture with Parque Arauco S.A., a Chilean shopping malls operator, LP is developing and planning to operate strip malls and shopping centers in Peru.
KEY RATING DRIVERS
Revenue Growth at Lower Pace:
The company showed significant business growth over the last few years. LP's total revenues grew from USD164 million in 2012 to approximately USD206 million in 2013 and USD235 million in 2014. The company is reducing its working capital needs, as land reserves are now equivalent to only three years of operations. Going forward, the company is planning to grow at a more moderate pace, with expected annual growth rates of approximately 6%-10%, which should reduce working capital needs.
Low Liquidity:
Fitch views the company's liquidity as weak. LP ended Dec. 31, 2014 with cash and short-term debt positions of USD21 million and USD67 million, respectively. The company's liquidity relies on its capacity to continue having credit access. LP is seeking to improve its financial flexibility through the refinancing of its debt with a target of having a flexible debt payment schedule with no major debt due during the next years. LP could temporarily take short-term debt to finance working capital needs.
Moderate Leverage:
LP's adjusted EBITDA during 2014 was USD55 million, resulting in an adjusted EBITDA margin of 23.3%. The ratings include the expectation that LP will maintain stable Adjusted EBITDA margins of around 23% over the next several years. As of Dec. 31, 2014, the company's total debt and cash positions were USD169 million and USD21 million, respectively. Around 46% of the company's total debt was composed of secured bank debt and local bonds. LP's gross leverage (total debt/adjusted EBITDA) as of Dec. 31, 2014 was 3.1x. The ratings incorporate the expectation that LP's gross leverage will be around 3.5x during the 2015-2018 period.
FCF Trend Incorporated:
The company showed negative FCF during the last five years. LP's FCF margin in 2014 was -4.3% which compares favorably with 2013 (-24.7%) as the company reached its target of strategic capex to build a three-year land bank. For 2015, LP's capex levels is expected to be lower than 2014 (around USD15 million) and half of it would be invested on parking lots development. More moderate growth and lower capex levels should result in the company's FCF levels trending to slightly negative levels.
Adequate Land Reserve:
LP manages its land reserves by only buying land to be developed in the near future. The company's land acquisition strategy is balanced against market demand and it is not intended to fit any government housing policy. Over the last few years, the company targeted a land bank reserve equivalent to three years of operations, which was achieved in 2013. The company's land reserves increased from 206 hectares in 2011 to 396 hectares by the end of 2014, which is mainly for land development, including a small portion (around 10%) for homebuilding and commercial use. Geographically, LP's land reserve is mostly located in the cities of Lima, Ica and Piura.
Receivable Portfolio, Low NPL levels:
As of Dec. 31, 2014, LP's accounts receivable portfolio amounted to USD144 million compared to USD126 million in 2013 and USD117 million in 2012. This calculation includes the deferred interest income to be charged over the installment contracts' collection period. The credit quality of LP's account receivable portfolio has remained stable as the level of non-performing loans (NPL) ratio - as a percentage of the total portfolio - reached average levels of 0.48% in the last three years. LP's business model for the installment sales contract financing activities considers the repossession of the lots when an event of default is declared upon three unpaid installments. This business characteristic supports low NPL levels.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--6-10% revenue growth during 2015;
--Stable EBITDA margin at 23%;
--Adjusted debt-to-EBITDA around 3.5x;
--Low liquidity absent of successful debt refinancing;
--Low-single negative 2015 FCF.
RATING SENSITIVITIES
A rating downgrade could be triggered by a more pressured liquidity position due to fail on refinancing and/or decline in the Peruvian macroeconomic environment affecting the company's operations and increasing leverage above the levels factored into the ratings.
A revision of the Outlook back to Stable could result if LP successfully refinance its debt resulting in improved liquidity coupled by stable consolidated margins and credit quality for its portfolio maintaining a consolidated adjusted gross leverage around 3.5x. Improvement on CFO and FCF generation would also be viewed positively.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
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=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981703
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