Fitch Downgrades Cyrela Commercial Properties' IDR to 'BB'; Outlook Revised to Negative

RIO DE JANEIRO--()--Fitch Ratings has downgraded Cyrela Commercial Properties S.A. Empreendimentos e Participacoes' (CCP) ratings as follows:

--Long-term Foreign Currency Issuer Default Rating (IDR) to 'BB' from 'BB+';

--Long-term Local Currency IDR to 'BB' from 'BB+';

--Long-term National Scale rating to 'AA-(bra)' from 'AA(bra)';

--Second debenture issuance, in the amount of BRL204.4 million, due in 2017, to 'AA-(bra)' from 'AA(bra)';

--Third debenture issuance, in the amount of BRL150 million, due in 2018, to 'AA-(bra)' from 'AA(bra)';

--Fifth debenture issuance, in the amount of BRL200 million, due in 2019, to 'AA-(bra)' from 'AA(bra)'.

The Outlook for the corporate ratings was revised to Negative from Stable.

The rating downgrades reflect the continued weakening of CCP's leverage ratios, pressured by the company's aggressive investment strategy in the last three years. Net leverage ratio significantly increased to 7.8x in 2014 from 4.7x in 2013 and 3.1x in 2012, well above Fitch's expectation of peak leverage around 6.0x in periods of high investments. CCP invested about BRL2.4 billion between 2012 and 2014 and plans to invest about BRL700 million in 2015 and 2016, which should prevent the company to deleveraging in the short term. CCP's cash flow generation should also be affected by weaker market environment, with higher vacancy rates and lower lease spreads, once demand for commercial properties is directly related to Brazil's macroeconomic conditions.

The Negative Outlook reflects CCP's important challenges to reduce net leverage to levels below 7.0x by the end of 2016, in a less favorable macroeconomic conditions. Fitch expects higher vacancy rates and lower lease spreads in rental contracts in the next couple of years. These factors should pressure even more the company's cash flow generation, offsetting the benefits from revenues of projects delivered and from investments' reduction from 2015 on. Higher operational cash burn, due to the expectation of higher financial expenses, will also affect the company's cash flow. CCP has a relevant challenge to improve its credit metrics to more healthy levels and in line with its current rating category, to prevent new rating downgrade. Fitch views that measures to reduce CCP's indebtedness and leverage would be positive, through a significant asset sale and/or capital increase, and could contribute to avoid new negative rating actions.

KEY RATING DRIVERS

Reduction of High Leverage is a Challenge

CCP's leverage significantly increased as a result of relevant investments since 2012 and is not expected to reduce in the short term. The company's net debt increased to BRL1.9 billion in December 2014 from BRL592 million at the end of 2012, to finance its high capex plan. As of Dec. 31, 2014, total debt/adjusted EBITDA ratio (including dividends received) was 10.2x and net debt/adjusted EBITDA was 7.8x, above Fitch's expectations. For 2015, Fitch projects net leverage around 10x and considers still high vacancy rates and lease spreads below inflation. Absent relevant asset sales or capital increase, leverage should not reduce to more conservative levels in the next three years and could pressure the ratings.

When compared with the economic value of the CCP's commercial properties, leverage also increased. The ratio loan-to-value, measured by net debt/estimated market value of assets, was of 43% at end 2014 (35% in 2013).

Cash Flow to be Pressured by Challenging Macroeconomic Environment and Investments

CCP benefits from a predictable cash flow from lease agreements. In 2014, the company generated BRL244 million of EBITDA and included BRL36 million from dividends received. Fitch projects EBITDA to remain relatively flat in 2015, if vacancy rates increase to 20% for office and warehouse segments and leasing spreads are below inflation rate. CCP should deliver a gross leasable area (GLA) of about 130 thousand sqm in 2015 and 2016, which should contribute to the company's cash flow generation capacity.

The large capex plan is expected to continue to pressure CCP's free cash flow (FCF), which is likely to remain negative in 2015 and 2016, excluding occasional property sales. In 2014, the company's cash flow from operations (CFFO) totaled BRL261 million and FCF was negative BRL681 million, as a result of investments of BRL906 million during the year. In 2014, FFO interest coverage reduced to 2.4x from an average of 4.3x between 2011 and 2013, while adjusted EBITDA/interest expense ratio was 1.4x.

Adequate Liquidity and Debt Profile

CCP's liquidity is satisfactory for debt maturities due in the short term and is an important rating consideration. As of Dec. 31, 2014, cash and marketable securities totaled BRL573 million and total debt, BRL2.5 billion. The company has BRL250 million of debt maturing in the short term and BRL307 million in 2016, of which BRL98 million and BRL165 million, respectively, consisted of corporate debt. CCP has about BRL554 million of debentures exposed to the financial covenant net corporate debt/EBITDA of 3.5x and BRL150 million to the 4.0x covenant. In 2014, the company reported 1.59x ratio and Fitch projects to remain close to 3.0x, at least in the next couple of years. CCP's cash position benefited from the BRL350 million CCB issued at the end of 2014. The company's liquidity is strengthened by a standby credit facility of BRL150 million that is not utilized. Fitch expects CCP to continue to manage its liquidity conservatively.

CCP's financial flexibility from its unencumbered assets reduced. As of Dec. 31, 2014, available unencumbered assets had an estimated market value of BRL534 million, which may be available for sale or serve as collateral for a secured financing, if needed. The estimated value of unencumbered assets covered about 0.6x of corporate debt of BR939 million.

Cyclicality of Commercial Properties Business

CCP's high portfolio quality supports its positive operational track record, with low tenant turnover and delinquency rates. However, the company's higher vacancy rate is a concern. As of Dec. 31, 2014, physical and financial vacancy rates were 11.3% and 14.4%, respectively. Fitch does not expect vacancy rates to reduce in 2015 and should remain pressured by the more challenging environment. Higher stock in the market also contributed to lower leasing spread, negative 1% in 2014.

CCP's lease contract expiration timeline continues well distributed, with 3% of the contracts (by revenues) maturing in 2015 and 17% in 2016. However, rent renewals programmed for 2015 and 2016, of 37% of the contracts (by revenues) each year, are high and could pressure leasing prices. The company has maintained low delinquency rates, even under diverse macroeconomic conditions.

CCP has a concentration of tenants and the 10 largest represented 56% of its revenues in 2014. This risk is partially mitigated by the high quality of tenants and property portfolio. CCP is one of the largest companies of investment, lease and commercialization of commercial properties in Brazil. At end 2014, the company owned 29 commercial properties in operation, with an estimated market value of BRL3.5 billion and GLA of 384 thousand sqm. CCP currently develops 16 projects, which should add 427 thousand sqm of GLA.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for the issuer include:

--Sale of one office building for BRL15 million in 2015;

--No acquisition of new properties;

--New GLA of about 130 thousand sqm in 2015 and 2016, including shopping centers and warehouses;

--Vacancy rates between 10% and 20%;

--Increase in average rent below inflation rates.

RATING SENSITIVITIES

Future developments that may individually or collectively lead to a negative rating action includes:

--Net corporate debt/EBITDA ratio above 3.0x in the long term;

--Expectation that net leverage, measured as net debt/EBITDA, will not reduce to levels below 7.0x in 2016, with a reduction trend in the following years;

--EBITDA to gross interest expense coverage ratio below 1.2x.

--Liquidity falling to levels that considerably weaken short-term debt coverage;

--Vacancy rates consistently above 10% and higher delinquency rates, which could result in a reduction in operational cash generation.

Positive rating actions are not expected in the medium term.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

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=982860

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Contacts

Fitch Ratings
Primary Analyst
Fernanda Rezende, +55-21-4503-2619
Director
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP: 20010-010
or
Secondary Analyst
Jose Roberto Romero, +55-11-4504-2603
Director
or
Committee Chairperson
Ricardo Carvalho, +55-21-4503-2627
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Fernanda Rezende, +55-21-4503-2619
Director
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP: 20010-010
or
Secondary Analyst
Jose Roberto Romero, +55-11-4504-2603
Director
or
Committee Chairperson
Ricardo Carvalho, +55-21-4503-2627
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com