Fitch Affirms Homex's Ratings at 'BB-'; Outlook Stable
by Business Wire
Fitch Ratings affirms Desarrolladora Homex, S.A.B. de C.V.'s (Homex) ratings as follows:
--Foreign currency Issuer Default Rating (IDR) at 'BB-';
--Local currency IDR at 'BB-';
--USD250 million in senior notes due 2015 'BB-';
--USD250 million in senior notes due 2019 'BB-';
--USD400 million in senior notes due 2020 'BB-'.
The Rating Outlook is Stable.
The rating affirmation incorporates Fitch's expectation that Homex's Homebuilding segment (excluding the penitentiary business line) free cash flow (FCF) will be neutral to positive in following years, EBITDA generation and margins will remain stable and the total debt to EBITDA ratio will be around 3.0 times (x). The ratings also reflect the company's solid market position in Mexico in terms of revenues and units sold, geographic diversification, as well as business strategy oriented mainly to the affiliated low-income housing segment. In addition, the ratings consider the company's business line diversification strategy and significant land reserves. The ratings are tempered by Homex's moderate leverage, expectation of substantial negative FCF in 2013 on a consolidated basis due to its penitentiary project and challenges associated with its construction and operation, a challenging operating environment and growing working capital requirements.
The Stable Outlook reflects the expectation that Homex's profitability and main credit metrics from its traditional homebuilding businesses will remain relatively stable in the short-to-medium term. On a consolidated basis, Fitch expects additional deterioration in credit metrics in 2013 mainly related to the penitentiaries project development.
Geographic Diversification Within Mexico:
Homex's geographic and business diversification strategy allows it to have alternate revenue sources, which are different from the traditional Mexican homebuilding segment. For the 12 months ended Sept. 30, 2012, traditional homebuilding represented 70% of consolidated income and Fitch expects this percentage to be around 85% in following years. Homex is one of the most geographically diversified homebuilders in Mexico with operations in 35 cities in 22 states. In Fitch's view, this operating diversification allows the company to mitigate local or regional volatility, which in turn translates into more stable results. Even though diversification exists, units sold are concentrated in Jalisco, Estado de Mexico and Baja California Sur.
Strategy on Low-Income Housing:
Business strategy is oriented mainly to the affiliated low-income housing segment in Mexico, which supports the ratings. Demand in this segment is strong because affiliated workers receive their mortgage financing from the government agencies such as Infonavit and Fovissste, and cash incentives in form of subsidies by Conavi. Low-income segment represented 89% of units sold and 55% of consolidated revenues for 12 months ended September 2012.
Increased Leverage but Stable Cash from Penitentiaries:
The development of this business segment has resulted in increased consolidated leverage ratios and negative FCF during the construction period, however, the contracts are expected to provide sustained cash flows of approximately MXN2.2 billion adjusted by inflation annually once the construction is finished in 2013 that will be associated to fully cover operations and debt service related to the construction of the penitentiaries. The construction is accounted under the percentage of completion method recording revenues that are not cash flow. The construction is funded by a loan from the Government's bank Banobras to Homex. This loan will be paid with the MXN2.2 billion in cash that Homex will receive over the 20-year term of the contract from the government related construction and operating services.
Land Reserves Provide Flexibility:
Fitch believes that Homex's strategy has flexibility to support future positive FCF generation, as the industry moves to a higher proportion of vertical construction. As of Sept. 30, 2012, Homex had land reserves of 78 millions square meters equivalent to 447,896 homes, out of which approximately 90% is reserved for low-income units, 9% is reserved for middle income homes and the rest for the tourism. The company's land reserves cover nine years of future operations at its current run rate; management's long term view is to maintain at least 3.5 years of future production.
Negative FCF Generation in 2013:
Fitch expects Homex's consolidated FCF to be negative in 2013 around MXN1 billion and positive around MXN0.7 billion excluding the penitentiaries projects. Fitch estimates that the company will deploy around 48,000 units during 2013; 60% of which are expected to be executed as vertical developments which require a longer working capital cycle. In addition, on a consolidated basis, the construction of the penitentiaries projects will reflect some additional working capital requirements that are funded by the Banobras loan. The company is expected to fund working capital requirements from its traditional homebuilding operations with cash on hand and internally generated cash flows.
Manageable Debt Profile
The issuance in 2013 of MXN$2 billion in long-term Certificados Bursatiles in the Mexican Market will be used to refinance a portion of its indebtedness with maturities from 2013 to 2015. Fitch considers this positive as it will improve Homex's financial flexibility and will extend its debt maturity profile. As of Sept. 30, 2012, Homex had MXN4 billion in cash and marketable securities. Total consolidated debt was around MXN20.9 billion: MXN16.1 from traditional operations and 4.8 from the penitentiary project. Scheduled maturities for 2013 and 2014 are MXN0.8 billion and MXN1.2 billion respectively. The company's long-term debt is primarily composed of two USD250 million senior unsecured notes due in 2015 and 2019, respectively and USD400 million senior unsecured notes due in 2020.
During the first nine months of 2012, total debt increased MXN5.5 billion compared to Dec. 31 2011; MXN4.8 billion of this increase is associated to loan for the construction of the penitentiaries. This loan is non-recourse to Homex, and the penitentiaries are non-restricted subsidiaries. In addition, the cash flows obtained from the operation of these contracts will be associated to cover operations and debt service of the project.
The ratings incorporate Fitch's expectation that Homex's homebuilding business gross leverage will be around 3.0x during 2013 and in the long term in the range of 2.5x-3.0x. According to Fitch's calculations, the company's EBITDA increased to MXN5.9 billion LTM September 2012 on a consolidated basis and MXN4.7 billion excluding penitentiaries from MXN4.2 billion at year-end 2011. Also according to Fitch?s calculation, consolidated total debt to EBITDA ratio increased to 3.6x for the 12 months ended Sept. 30, 2012. This ratio excluding penitentiaries was 3.4x versus 3.3x in December 2011. For the 12 months ended Sept.30, 2012 Homex's consolidated net debt to EBITDA was 2.9x.
Sustained improvement in the company's FCF and leverage in the traditional business operations, in conjunction with stable market share, liquidity and profitability, are factors that could result in positive rating actions.
Conversely, negative rating actions could result from some combination of the following factors: Pro forma debt/EBITDA leverage ratio (excluding the penitentiary business line) is consistently above expected levels, the penitentiary construction and execution fails to a point that demands additional resources from Homex's core business, longer working capital cycle from its homebuilding segment, growth more aggressive than expected in Brazil Homebuilding and Tourism segments, a decline of government funding programs, and deterioration in the company's industry business environment leading to erosion in the company's market position.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology