Fitch Affirms Caparra Hills LLC's IDR at 'B+', Secured Debt at 'BB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Caparra Hills LLC (Caparra Hills) long-term Issuer Default Rating (IDR) at 'B+' and the senior secured debt at 'BB'. The Rating Outlook is Stable.

The ratings reflects Caparra Hills' limited property diversification, size and concentration risk and a loan to value of 76% based on gross debt and a property value of USD73.5 million. It also reflects Fitch expectation that the debt service coverage measured as EBITDA over interest and principal will be at about 1.1x-1.2x over the next 18 months and that gross leverage will reach a peak in the financial year to end-June 2016 (FY16) at about 9x and then decline below 8x.

KEY RATING DRIVERS

Recovering Occupancy Rates:

Fitch expects occupancy rates will recover to historical levels by FY17. Fitch's base case projections anticipate occupancy will reach 83% by FY16 and 94% by FY17. Occupancy rates deteriorated during the last year following the departure of a major tenant (Santander Securities), as well as the reduction in space by a second major tenant. Caparra Hills has already leased approximately 76% of the space vacated by these major tenants and is negotiating new rents for the remaining available space.

Concentration and Contracts Risk:

Fitch expects that counterparty risk and contract maturity will continue to improve as the company replaces main tenants. As of Sept. 30, 2015, Santander Tower's occupancy rate was 67.2% of which about 58% was occupied by nine major tenants (85% at Sept. 30, 2014.) The company's lease maturity portfolio will be manageable over the next 12 months as only 15% of leases mature over the next 12 months. The company has a good track record of renewing its leases, and is quickly replacing the loss of Santander.

Secured Bond Enhances Recovery Prospects:

The 'BB' rating or the secured bonds positively incorporates the collateral support included in the transaction structure. The payments of the bonds are secured by a first mortgage on the company's real estate properties and the assignment of leases. The secured bonds are payable solely from payments made to the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (AFICA) by Caparra Hills. AFICA serves solely as an issuing conduit for local qualified borrowers for the purpose of issuing bonds pursuant to a trust agreement between AFICA and the trustee. The secured bonds are not guaranteed by AFICA, do not constitute a charge against the general credit of AFICA, and do not constitute an indebtedness of the Commonwealth of Puerto Rico or any of its political subdivisions.

Rising Leverage:

Fitch expects Caparra Hills gross leverage to reach 9x by FY16 and then gradually improve to below 8x by FY17 as a result of increased revenues from new tenants, stable EBITDA margins and lower capex requirements. Gross leverage increased during the last 12 months as a result of increased vacancy rates after losing one if its major tenants. Caparra had USD55.8 million of total debt as of Sept. 30, 2015, which was composed entirely of secured bonds which requires approximately USD5.3 million of annual debt service (interest and principal).

KEY ASSUMPTIONS

--Occupancy rates;

--EBITDA margin of about 64%-65%;

--Debt to EBITDA reaching 9x at FY16 and below 8x going forward;

--Positive free cash flow (FCF) of about USD1.1 million in FY17.

RATING SENSITIVITIES

A downgrade could be triggered due to a lack of a rapid improvement of the company's vacancy rates, contract maturity schedule coupled with declining cash flow generation, measured as EBITDA, resulting in weaker credit metrics.

Conversely, lower business risks in terms of contract maturity schedule, concentration risk while improving cash flow generation resulting in lower gross leverage of about 6.5x and loan to value of 60% could trigger a positive rating action.

LIQUIDITY

Caparra's liquidity position is supported by its positive cash flow from operations (CFFO) and high cash position. As of Sept. 30, 2015, Caparra Hills had USD4.2 million of cash while its short-term debt obligation was USD1.5 million. Additionally, the company maintains a debt service reserve fund of approximately USD8.5 million, covering 18 months of debt service, and an unsecured line of credit for USD1 million. FCF is expected to turn negative during FY16 but will return to positive levels during FY17 driven by increased revenues from new tenants and lower capex requirements.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Caparra Hills LLC

--Long-term IDR at 'B+';

--Senior secured debt at 'BB'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 07 Dec 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873504

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996239

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996239

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Johnny da Silva
Director
+1-212-612-0367
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Jose Vertiz
Director
+1-212-908-0641
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Johnny da Silva
Director
+1-212-612-0367
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Jose Vertiz
Director
+1-212-908-0641
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com