Fitch Revises BRMALLS' Outlook to Positive; Affirms IDRs at 'BB+' & Nat'l Scale at 'AA (Bra)'

NEW YORK--()--Fitch Ratings has affirmed the ratings of BRMALLS Participacoes S.A. (BRMALLS) 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, respectively, at 'AA (bra)';

--BRL400 million local debentures due in 2016 at 'AA (bra)';

--BRL270 million local debentures due in 2016 at 'AA (bra)'.

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

--Foreign currency IDR at 'BB+';

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

Simultaneously, Fitch has also withdrawn Finco's long-term IDR.

The Rating Outlook has been revised to Positive from Stable.

BRMALLS' ratings reflect its leading business position as the largest Brazilian shopping center operator, stable and predictable cash flow generation, geographical and property revenue base diversification, and low working capital requirements with renters responsible for most maintenance expenses. The ratings also factors in BRMALLS' growth strategy, stable capital structure, large pool of unencumbered assets, and successful track record in growing the business. The company's consistent use of a balance of equity and debt to fund its organic and inorganic growth during the past five years has kept leverage levels low relative to the value of its assets.

KEY RATING DRIVERS

Positive Outlook:

The Outlook revision to Positive from Stable reflects expectations of continued improvement in the company's credit profile during the next 12-to-24 months period resulting in the company's levels of net leverage consistently at or below 4x, interest coverage ratio at or above 2.5x, improvement in the debt payment schedule reducing current levels of short-term debt relative to cash position, and keeping EBITDA margin stable around 80%.

Business Position and Asset Diversification Incorporated:

BR Malls Participacoes S.A. (BR Malls) has a strong business position and property portfolio quality. As of Sept. 30, 2014, the company is the largest Brazilian shopping center operator, holding an interest in 50 malls with a total gross leasable area (GLA) of 1,729 thousand square meters of which it owns 1,004 thousand square meters. BR Malls has operations in all five regions of Brazil, and its top five malls represent approximately 30% of its total net operating income (NOI).

Stable Cash Flow:

Both rents and NOI per square meter are stable to positive for BR Malls. They are supported by a lease structure that consists of fixed-rent payments (70%) and tenant reimbursements (10%), both of which cover costs associated with property management and taxes. The company's EBITDA margin is expected to remain stable at around 80% during the 2014-2015 period. During latest 12 months (LTM) Sept. 30, 2014, EBITDA was BRL1.1 billion, a 19% increase when compared with 2012 EBITDA of BRL910 million. Fitch expects BR Malls' 2015 EBITDA to be around BRL1.2 billion.

Low Leverage:

BR Malls' net leverage has been declining during the last 24 months. As of Sept. 30, 2014, the company's total net debt was BRL4.7 billion, resulting in a net leverage ratio of 4.4x. This ratio was 4.7x by December 2012. The Positive Rating Outlook incorporates the view that BR Malls will continue reducing its net leverage ratio trending to levels below 4x during the next 12 to 24 months.

Good Liquidity:

The company liquidity is viewed as adequate based on its cash position, stable interest coverage ratio, unencumbered assets level, and access to equity and debt markets, locally and internationally. By Sept. 30, 2014, BR Malls had BRL451 million and BRL675 million in cash and short-term debt, while its coverage ratio measured as total EBITDA to interest expenses have been around 2.1x during the last four years. BRMALLS also has good access to credit through capital markets and banks, and financial flexibility resulting from good quality assets that could be easily monetized. The company maintains a large pool of unencumbered assets that could provide alternative sources of financing if required. Unencumbered assets make up about 48% of its owned Gross Leasable Area (GLA), estimated to be about 479,975 square meters. The company levels of unencumbered assets cover approximately 4x its unsecured debt of BRL2.2 billion by the end of the period.

Healthy Metrics, SSR Stable, No Delinquencies Issues:

The company has maintained solid levels of occupancy rates at around 97.5% between 2012 and 2014. Late payments have been manageable at around 3.5%-4% during this period. Same store sales (SSS) have continued relatively stable during 2014, growing by approximately 7.5% compared with 2012-2013 levels. Same store rent (SSR) has slowed slightly during 2014, but remains adequate around 8.5%.

Concentration in Lease Duration Neutral to Credit Quality:

BR Malls' lease portfolio has some concentration in lease-expiration dates as about 49% of its rental contracts will expire during the next 24 months ended in September 2016. This situation is the standard for most Brazilian shopping mall as it reflects the sector's average contract period of around five years, which implies a 20% level of total contract expiring each year. Considering the company's trend during last years in terms of high occupancy (above 96%) and the average spread renewals (around 15% to 20%), the level of contracts expiring during the next 24 months is viewed as neutral to credit quality and as an opportunity for the company to increase revenues.

RATING SENSITIVITIES

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

--Fitch's expectation of coverage ratio - measured as EBITDA to interest expenses ratio - sustaining at or above 2.5x;

--Fitch's expectation of net leverage - measured as total net debt to EBITDA ratio - sustaining at or below 4x.

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

--A highly leveraged transaction that materially weakens the company's credit profile;

--Fitch's expectation of coverage ratio remaining around 2x;

--Fitch's expectation of net leverage remaining in the 4.5x to 5x range.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology - Including Short-Term Ratings and Linkage Between Holding Companies and Subsidiaries' (May 28, 2014);

-- Brazilian Shopping Malls Dashboard 1H14 (June 17, 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

Brazilian Shopping Malls Dashboard 1H14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750270

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=934215

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Contacts

Fitch Ratings
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
Ricardo Carvalho
Senior Director
011 5521 4503 2627
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
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
Ricardo Carvalho
Senior Director
011 5521 4503 2627
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com