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Rating Action:

Moody's assigns a Ba2/A1.br rating to Gafisa's senior unsecured debentures and revises the outlook to stable

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 negative.

Ratings Assigned:

-BRL 300 million unsecured debentures: Ba2/A1.br

Ratings Affirmed:

-Corporate Family Rating: Ba2/A1.br

-BRL 600 million senior secured debentures: Ba1/Aa2.br

RATINGS RATIONALE

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 issuance.

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 unsecured ratings.

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 earlier.

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.

REGULATORY DISCLOSURES

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 for further information.

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.

Sao Paulo
Marcos Schmidt
Analyst
Corporate Finance Group
Moody's America Latina Ltda.
55-11-3043-7300

New York
Brian Oak
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
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Brazil

Moody's assigns a Ba2/A1.br rating to Gafisa's senior unsecured debentures and revises the outlook to stable
No Related Data.
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