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Global Credit Research - 24 Sep 2010
Approximately BRL 900 Million of Debt Securities Affected
Sao Paulo, September 24, 2010 -- Moody's has assigned a Ba2 local currency and a A1.br Brazil national
scale rating to Gafisa S.A.'s ("Gafisa") proposed BRL 300
million senior unsecured debentures issuance. The proceeds will
be used in the lengthening of the company's debt profile and lowering
the cost of debt though the payment of upcoming more expensive debt maturities,
such as other unsecured debentures, CCBs and working capital loans.
At the same time, Moody's affirmed Gafisa's Ba2/A1.br corporate
family ratings ("CFR") and Ba1/Aa2.br senior secured debentures
rating. The outlook for the ratings was changed to stable from
-BRL 300 million unsecured debentures: Ba2/A1.br
-Corporate Family Rating: Ba2/A1.br
-BRL 600 million senior secured debentures: Ba1/Aa2.br
The change in outlook to stable mainly reflects Gafisa's stronger sales
speed and higher volume of launches compared to the last quarter of 2008
when the outlook was changed to negative as well as higher operating margins
(16.9% in the last twelve months ended in June 2010) that
are expected to further increase. More favorable macroeconomic
environment, government and banking financial support towards the
industry, more comfortable debt maturity profile after the issuance
of the proposed debentures, lower leverage and better liquidity
also support the outlook stabilization.
Gafisa's Ba2 rating continues to reflect its strong market share position,
its diversified product portfolio with a strategic land bank position
distributed across 198 projects in 22 states, plus Brasilia capítal
district, experienced and conservative management team, and
good access to the capital markets as proven by the company's BRL
1.02 billion net equity issuance in March 2010. The rating
is further supported by Gafisa's strong brand name in the Brazilian homebuilding
sector and long track record of operations that started in 1954,
thus having managed through a number of economic crises. On the
other hand, these positive factors are constrained by Gafisa's higher
leverage when compared to higher rated local peers as well as lower profitability
as measured by gross margin. Gafisa's concentration on the
high-rise segment, which pressures working capital and free
cash flow due to the extended construction periods of more than 2 years
also constrains the ratings.
During the last twelve months ended in June 2010, Gafisa reported
net sales of BRL 3.6 billion, up 61% compared to the
same period last year, reflecting higher volume of launchings and
accelerated pace of construction that allowed the company to recognize
a significant amount of revenues. Tenda, the lower income
brand of Gafisa contributed with 32% of the revenues with an average
price per unit of BRL 100,000 .
From 2011 on, according to the company's project delivery schedule,
it is expected that Gafisa will start generating a higher volume of cash
internally, since a large amount of projects launched in 2007 and
2008 will be delivered to their buyers and converted into cash.
We expect that the company will use part of this cash to build a stronger
cash cushion to more comfortably face an eventual downturn in the homebuilding
industry or to pay down part of its corporate debt unrelated to construction,
and deleverage its balance sheet.
By the end of June, 2010 Gafisa had BRL 1.8 billion in cash
and marketable securities on its balance sheet, and BRL 945 million
in short term debt coming due during the 4Q'10 and 2011.
Out of the BRL 945 million, BRL 466 million are comprised of more
expensive unsecured indebtedness and will be repaid with the BRL 300 million
debentures and BRL 166 million in existing cash. BRL 300 million
of the short term debt are SFH loans linked to construction that will
be extinguished once the keys are delivered, and the remaining BRL
179 million are other unsecured loans that will be repaid with the company's
existing cash balance.
Beside the BRL 1.8 billion in existing cash Gafisa has approved
and signed SFH loans that are sufficient to finance the construction of
all of its already launched projects.
The company has a minimum cash policy of maintaining at least 20%
of the total equity value in cash and a maximum leverage policy of net
debt to equity up to 60%. Both policies are written policies
approved by the board of directors.
While the proposed unsecured debentures will be structurally subordinated
to Gafisa's existing secured debt, they are rated at the same
level as Gafisa's CFR given the high amount of unencumbered assets
that in case of a default that should provide good recovery for the unsecured
instruments. As of June 30, 2010, and pro-forma
for the new transaction, 47% of Gafisa's outstanding debt
are secured by assets, mainly receivables from construction projects
being developed with any collateral deficiency becoming an unsecured claim
on the remaining assets of the company but senior to the proposed debenture
A meaningful change in the proportion of secured versus unsecured debt
or a decrease in the amount of unencumbered assets that could be used
to pay down the unsecured debentures could result in a downgrade of Gafisa's
Although unlikely in the near term, Gafisa's rating or outlook could
experience upward pressure if the company is able to reduce its leverage
metrics on a sustainable. Upward pressure could also arise from
improved cash-flow based credit metrics, through reduced
working capital requirements over time and higher volume of projects achieving
their delivery date. Mortgage availability at an earlier point
of the construction cycle and use of internal generated cash for reducing
debt, not linked to construction would also be credit positive.
Quantitatively, positive pressure could arise from sustainable positive
CFO ("Cash Flow from Operations") and FCF ("Free Cash Flow") to total
debt above 10%, total debt to capitalization below 40%
(46.9% in the end of June 2010), FFO ("Funds From
Operations") to total debt above 25% (19.8% for the
last twelve months ended in June 2010) and interest coverage (EBIT to
Interest expense) above 4.5 times (2.2 times for the last
twelve months ended in June 2010) on a sustainable basis.
Gafisa's ratings would likely be downgraded if Total Debt to Capitalization
increased above 50% (46.9% in the end of June 2010)
on a sustainable basis or if the company were to face a significant deterioration
in its liquidity profile due to a reduction in the availability and timeliness
of disbursements from SFH credit lines that the company has available
with commercial banks, due to a change in government's support towards
the lower income construction segment, or due to excessive dividend
payout that could instead be used in the down payment of debt unrelated
to construction. Quantitatively, negative pressure could
arise if the company diverged from the written minimum cash policy mentioned
Gafisa's Ba2 local currency corporate family rating reflects its
global default and loss expectation, while the A1.br national
scale rating reflects the standing of its credit quality relative to other
domestic issuers. Moody's National Scale Ratings (NSRs) are intended
as relative measures of creditworthiness among debt issues and issuers
within a country, enabling market participants to better differentiate
relative risks. NSRs in Brazil are designated by the ".br"
suffix. Issuers or issues rated A1.br demonstrate above-average
creditworthiness relative to other domestic issuers. NSRs differ
from global scale ratings in that they are not globally comparable to
the full universe of Moody's rated entities, but only with other
rated entities within the same country.
The principal methodology used in rating Gafisa S.A. was
Global Homebuilding Industry rating methodology published in March 2009.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
Moody's last rating action for Gafisa occurred on December 10th,
2009, at which time Moody's assigned a Ba1/Aa2.br rating
to Gafisa's BRL 600 million secured debentures.
Headquartered in Sao Paulo, Brazil and founded in 1954, Gafisa
is one of the largest fully integrated homebuilders in Brazil, and
also one of the most diversified in terms of product offering to different
income levels and geographic regions, operating in 21 different
states with 195 projects under development.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service's information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
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Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Corporate Finance Group
Moody's America Latina Ltda.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's America Latina Ltda.
Moody's assigns a Ba2/A1.br rating to Gafisa's senior unsecured debentures and revises the outlook to stable
Avenida Nacoes Unidas, 12.551
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