Fitch Affirms BR Malls' IDRs at 'BB+'; Nat'l Scale at 'AA+(bra)'; Long-term National Rating Stable

NEW YORK--()--Fitch Ratings has affirmed the ratings of BR MALLS Participacoes S.A. (BR Malls) as follows:

--Foreign currency Issuer Default Rating (IDR) at 'BB+';

--Local currency IDR at 'BB+';

--Long-term national scale rating at 'AA+(bra)';

--BRL400 million local debentures, first and second tranches due in 2017 and 2019, at 'AA+ (bra)'.

Fitch has also affirmed the following rating of BR Malls International Finance Limited (Finco):

--USD405 million perpetual notes at 'BB+'.

The Rating Outlook for the Foreign Currency IDR remains Negative. The foreign currency ratings of BR Malls could be negatively impacted by a negative rating action on the sovereign rating of Brazil and/or a downgrade of its country ceiling. The Outlook for Brazil's foreign currency rating is currently Negative.

Fitch has revised the Rating Outlook for the Local Currency IDR and National Long-Term Rating to Stable from Positive. The Positive Outlook reflected Fitch's former expectations of continued improvement in the company's credit profile with net adjusted debt/EBITDA ratio consistently below 4x, sustained interest coverage ratio at or above 2.5x, and stable EBITDA margin around 80%. Fitch no longer expects these improvements to occur during 2016-2017.

KEY RATING DRIVERS

Negative-to-Flat 2016 Revenue Growth:

Fitch expects the company's revenue to decline in 2016 around -4% driven by lower levels of owned Gross Leasable Area (GLA) and slightly weakening in operational performance. This decline in revenues is due to a combination of some assets being sold, and some weakening in the company's operational metrics. BR Malls' EBITDA margin is expected to remain around 77% during the 2016-2017 period. During the LTM ending Sept. 30, 2016, EBITDA was BRL1.1 billion, which is flat when compared with the prior year period. Fitch expects BR Malls' annual average EBITDA to be around BRL1.2 billion during 2016 to 2018. The company is projected to maintain healthy occupancy rates of around 96%, while late payments are expected to remain at manageable levels in the 3% to 5% range despite some weakness in tenant sales and SSS observed during 2016.

Adequate Liquidity, Moderate Leverage:

The company is expected to maintain adequate levels of liquidity considering its manageable three-year debt payment maturity schedule, anticipated levels of available cash, stable interest coverage ratio, unencumbered asset level, and credit access. BR Malls' interest coverage was 2x during the LTM ending Sept. 2016, and is expected to remain in the 1.6x to 2.3x range during 2016 to 2018. BR Malls' total debt was BRL5 billion as of Sept. 30, 2016. The company's U.S. dollar-denominated debt (perpetual notes) represents approximately 25% of the company's total debt. BR Malls' net adjusted debt/EBITDA ratio declined to 4.5x during the LTM to Sept. 30, 2016. This net leverage ratio is projected to continue declining to around 4x during 2017. No major additional debt is anticipated during this period.

Weakening Operational Metrics, Manageable:

BR Malls has exhibit a slightly weakening trend in recent quarters for its same-store sales (SSS), with quarterly variations levels of 0.9%, 1.2%, -1.7%, and -0.6% during fourth-quarter 2015, first-quarter 2016, second-quarter 2016, and third-quarter 2016 respectively. Over the same quarters, the company's same-store rent (SSR) reached variations of 6.4%, 7.4%, 2.2%, and 2.6% respectively. Net late payment ratios were 1.9%, 5.7%, 4.8%, and 3.7% respectively, over the same period, illustrating the worsening economic difficulties encountered in Brazil. The ratings factor in a slow recovery in these metrics as Brazil's macroeconomic environment improves during 2017.

Focus on Organic Growth:

The company's capital intensity ratio, measured as total capex/revenue, was 48% and 26% in 2014 and 2015, respectively. Fitch expects this ratio to remain in the 15% to 20% range during 2016 to 2018. The company is expected to have a positive single-digit FCF margin during 2016 to 2018 as it adjusts down its capex plan. The company has consistently sustained good levels of cash flow generation during the last years. BR Malls generated CFFO of BRL381 million during the LTM ended Sept. 30, 2016. The company's FCF was slightly negative BRL17 million, after capex of BRL293 million and paid dividends of BRL105 million. BR Malls' FCF margin, measured as total FCF/Revenues ratio, was -1.2% during LTM September 2016.

KEY ASSUMPTIONS

Key assumptions within Fitch's rating case for BR Malls' ratings include:

--Occupancy levels around 96% during 2016-2018;

--Annual revenue growth of -4%, +8% and +12.6%, in 2016, 2017 and 2018, respectively;

--EBITDA margin around 77% during 2016-2018;

--Net leverage ratio, measured as Net debt to Adjusted EBITDA ratio, in the 4x to 4.5x range during 2016-2017;

--No acquisition activity during 2016-2018.

RATING SENSITIVITIES

Positive Rating Actions:

Fitch would consider a positive rating action if the company's financial profile improves due to some combination of the following: aggressive capex, better than expected macroeconomic trends leading to stronger credit metrics, higher EBITDA margins.

The following factors may also have a positive impact on BR Malls' ratings:

--Capacity to consistently maintain EBITDA margin and occupancy around 80% and 96%, respectively;

--Net leverage consistently in the 3.5x to 4x range;

--Interest coverage, measured as adjusted EBITDA to gross cash interest exp. paid, trending consistently to levels above 2.25x;

--Capacity to consistently maintain unencumbered assets-to-net unsecured debt coverage consistently around 3x.

Negative Rating Actions:

The foreign currency ratings of BR Malls could be negatively impacted by a negative rating action on the sovereign rating of Brazil and/or a downgrade of its country ceiling. The Outlook for Brazil's foreign currency rating is currently Negative.

Fitch would also consider a negative rating action on BR Malls' ratings if the company's financial profile deteriorates due to some combination of the following: aggressive capex, adverse macroeconomic trends leading to weaker credit metrics, significant dividend distributions, and higher vacancy rates or deteriorating lease conditions.

The following factors may also have a negative impact on BR Malls' ratings:

--Net leverage consistently trending to levels around 5x;

--Deterioration in EBITDA margin, trending to levels below 76% toward the end of 2018;

--Material increase in secured debt / total debt ratio above current levels of 50%;

--Deterioration in the company's debt payment schedule from current levels;

--Unencumbered assets-to-net unsecured debt coverage consistently below 2.5x.

LIQUIDITY

BR Malls' liquidity is viewed as adequate based on its cash position, interest coverage ratio, unencumbered assets level, and access to equity and debt markets, locally and internationally. BR Malls had BRL405 million and BRL388 million in cash and short-term debt as of Sept. 30, 2016, while its LTM September 2016 coverage ratio measured as total EBITDA cash interest expenses was 2x, a slight improve from 1.7x and 1.9x in 2015 and 2014, respectively.

BR Malls faces debt payments of BRL388 million (including revolving debt) and BRL375 million during the next 12- and 24-month period ended in September 2017 and September 2018, respectively. Fitch views the company's debt payment schedule as adequate for its cash flow generation, liquidity, and credit access. BR Malls also has good access to credit through capital markets and banks, and financial flexibility resulting from good quality assets that could be monetized. BR Malls maintains a significant pool of unencumbered assets that could provide alternative sources of financing if required. The company's level of unencumbered assets covers approximately 4x its unsecured debt as of Sept. 30, 2016.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015281

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https://www.fitchratings.com/regulatory

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or
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011 5511 4504 2600
or
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or
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Contacts

Fitch Ratings, Inc.
Primary Analyst
Jose Vertiz
Director
+1-212-908-0641
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jose Romero
Director
011 5511 4504 2600
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com