RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed MRV Engenharia e Participacoes S.A.'s (MRV) long-term national scale rating at 'AA-(bra)'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
MRV's ratings remain supported by the company's satisfactory capacity to preserve its conservative credit metrics in a more instable business environment, preserving sales speed above industry average and still low inventory of concluded units. MRV has been efficient in managing low leverage, adequate debt profile and satisfactory liquidity, which combined with positive operational cash flow generation on a recurring basis, contributed to satisfactory support of its corporate debt maturities and its business base.
The level of cancelled sales contracts reported by MRV, which remains high, is a concern. Sales cancellation averaged 21% between 2012 and 2014 and increased to about 27% of pre sales in the LTM period ended March 2015. Low inventory of concluded units indicates that the company has been efficient in reselling the units cancelled; however, current market conditions have proved to be more challenging. In general, the deterioration of the Brazilian macroeconomic scenario has affected the majority of the sectors and more intensely the homebuilding sector. This segment is highly correlated with the local economy, is strongly vulnerable to an economic slowdown, higher unemployment and interest rates, and restrictions in lines of credit. This scenario could further pressure sales cancellation and reduce the company's capacity to resell the units.
An additional challenge to MRV is its business strategy for the low income sector, which is more exposed to the cyclical nature of the homebuilding sector. This in effect makes the company more vulnerable to government policies for the sector, especially in the segment covered by the Minha Casa Minha Vida program. MRV's strong dependence on Caixa Economica Federal (Caixa) and Banco do Brasil S.A., the main financing agents in its business, are risk factors. A great part of MRV's funding source is provided by Fundo de Garantia do Tempo de Servico (FI FGTS).
Cash Flow from Operations To Remain Positive
MRV reported positive cash flow from operations (CFFO) since 2012, benefiting from more stable project launches. In the LTM ended March 2015, MRV reported EBITDA of BRL660 million, funds from operations (FFO) of BRL210 million and CFFO of BRL740 million, positively affected by important volume of receivables transferred to banks of BRL4.5 billion in 2014 and BRL1.0 billion in the first quarter of 2015.
Fitch expects CFFO to remain positive, supported by the stabilization of the company's project launches between BRL4 billion and BRL5 billion. MRV's business model benefits from standardized projects financed by appropriate funding sources. The company's working capital needs positively distinguish it from its Brazilian peers in the sector due to its shorter construction cycle.
Challenging Environment to Pressure Cancellation of Sales Contracts
The company reported cancellation of sales contracts of BRL1.5 billion in 2014 and BRL438 million during the first quarter of 2015. Higher sales cancellation is a result of the bank's more restricted credit policy and lower disposable income of homebuyers. Sales cancellation relative to gross pre sales increased since 2012 and was 26.7% in the LTM ended March 2015, compared to 24.1% in 2014 and 21.4% in 2013. MRV was able to resell about 94% of the units in 2014. Fitch expects cancellation of sales contracts to remain high in 2015, pressured by weaker macroeconomic environment.
Expectation of Gradual Leverage Reduction
MRV's leverage should gradually reduce as the company's operating cash flow generation improves due to the stabilization of project launches. In the LTM ended March 2015, net adjusted debt/EBITDA ratio was 2.3x, considering BRL368 million debt guaranteed by MRV, and compares with an average of 2.5x reported in 2013 and 2014. Although not expected in the short term, higher dividend distribution and/or share repurchase program could pressure the company's free cash flow (FCF) and its capacity to deleverage.
When analyzed under cash flow basis, the ratio measured as 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 was 2.4x in March 2015, against 2.3x in December 2014.
Adequate Operating Margins
MRV continued to benefit from lower supply and competition in the low income segment, despite the instable business environment. In the LTM ended March 2015, EBITDA margin was 15.3% and compares with 15.5% reported in 2014 and 16.6% in 2013. Fitch expects EBITDA margin around 15% in 2015 and 2016.
MRV launched BRL4.3 billion of potential sales value (PSV) in 2014 and BRL2.0 billion in the first half of 2015, compared to BR3.5 billion in 2013. Sales speed, measured as the total pre-sales net of cancellations of sales contracts/supply ratio, was 16% in the first quarter of 2015, compared to an average of 19.8% per quarter in 2014, and was above market average. As of March 31, 2015, inventory had estimated market value of BRL5.0 billion, of which only 4% was related to finished units. However, inventory of finished units is expected to increase as 24% of total inventory, or BRL1.2 billion, will be delivered in 2015.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--EBITDA margin around 15%.
--Annual CFFO of BRL500 million.
--Project launches between BRL4 billion and BRL5 billion.
--Net adjusted leverage below 2.5x.
RATING SENSITIVITIES
Future developments that may individually or collectively lead to a negative rating action includes:
--Cash to short term corporate debt coverage, including short term debt guaranteed by MRV, reduces to levels below 1.3x;
--Increase in net adjusted leverage to levels above 3.0x on a recurring basis;
--Sales cancellation above 35% of pre sales;
--Resell less than 70% of units cancelled;
--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 ratio consistently below 2.5x;
--More unstable macroeconomic environment, which could impact the homebuilding sector's fundamentals.
A positive rating action is unlikely in the short to medium term.
LIQUIDITY
MRV efficiently preserved a conservative liquidity position. As of March 31, 2015, cash and marketable securities was BRL1.6 billion, compared to total adjusted debt of BRL3.1 billion, including BRL368 million of debt guaranteed by MRV. MRV has BRL1.2 billion of debt maturing in the short term and BRL1.3 billion from April to December 2016, of which BRL857 million and BRL987 million, respectively, are corporate debt. During the second quarter of 2015, the company repaid about BRL270 million of corporate debt. Despite higher debt maturities, Fitch views MRV's debt amortization profile as manageable and supported by adequate liquidity and positive cash flow generation.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
MRV
--Long-term national scale rating at 'AA-(bra)';
--5th debentures issuance, in the amount of BRL500 million, due in 2016 at 'AA-(bra)';
--6th debentures issuance, in the amount of BRL500 million, due in 2017 at 'AA-(bra)';
--7th debentures issuance, in the amount of BRL300 million, due in 2016 at 'AA-(bra)'.
The Rating Outlook for MRV is Stable.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
National Scale Ratings Criteria (pub. 30 Oct 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988698
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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