Sao Paulo, February 28, 2011 -- Moody's Investors Service has assigned first-time Ba2 local currency
and Aa3.br Brazil national scale corporate family ratings to Brookfield
Incorporações S.A. ("Brookfield").
The outlook for the ratings is stable.
-Corporate Family Rating: Ba2/Aa3.br
"Brookfield's Ba2 rating reflects its position among the top five largest
homebuilders in Brazil with strong brand name, long track record,
diversity in terms of product offering ranging from economic to high income
apartments and office buildings.", said Moody's Analyst,
Marcos Schmidt. "The rating also considers the company's significant
market share in its geographic markets, adequate corporate governance
standards, increasing geographic diversity, relatively low
leverage when compared to peers, good profitability, and the
benefit of having Brookfield Asset Management Inc. ("BAM")
(Baa2/STA) as the largest individual shareholder. Conservative
financial policies have contributed to adequate debt protection metrics
and liquidity for this rating level.", added Schmidt.
On the other hand, Brookfield's rating is constrained by the geographic
concentration of the company's landbank in São Paulo and Rio de
Janeiro, aggressive growth through acquisitions that more than doubled
the size of the company since 2008. Focus in the high-rise
segment that pressures working capital and free cash flow due to the extended
construction periods and potential increase in leverage over the next
three years also constrain the ratings.
Brookfield is the result from the combination of Brascan, Company
and MB Engenharia all strong brand names with long experience in the Brazilian
homebuilding market. Brascan started its operations in Rio de Janeiro
in 1978, MB Engenharia started its operations in 1986 in Goiania
and was acquired in April 2008, Company in its turn started its
operation in 1982 in Sao Paulo and was acquired in October 2008.
In June 2009 the group's name was changed to Brookfield Incorporações
S.A. consolidating the three names and associating its franchise
to its indirect controlling company, BAM. BAM is an asset
manager with more than USD 100 billion in assets under management of which
USD 41 billion are in real estate.
Brookfield's shares are listed on the Bovespa's "Novo
Mercado", which is the highest level of corporate governance
standards in the Brazilian stock market and is also Sarbanes-Oxley
(SOX) compliant through BAM.
In addition to BAM which controls 42.6% of the shares,
the other shareholders include those in the shareholder's agreement
who hold 6.1%. The market holds the largest stake
with the remaining 51.3%.
With some BRL 2.85 billion of net revenues in LTM ending in September,
2010, Brookfield is one of the 5 largest players in Brazil.
The company's launches are distributed across Sao Paulo (23%),
Rio de Janeiro (22.1%), the Mid West region (18.6%)
and Brasilia (33.2%), regions that together account
for around 60% of Brazil's GDP, Sao Paulo alone concentrates
34% of the country's GDP and 45% of the Brazilian
real estate market.
The merger between the three companies provided better geographic distribution,
stronger bargaining power in the purchase of raw materials and land from
suppliers, as well as with better bargaining power for the hiring
of service. The companies are now fully merged and integrated.
Despite its fast organic growth and acquisitions, Brookfield has
been able to maintain an adequate capital structure and interest coverage,
with total adjusted debt/book capitalization of around 40%,
one of the lowest in the local market and EBITA to Interest of around
3.2 times. It is important to mention that 35% or
BRL 623 million of total debt of BRL 1.8 billion is comprised of
construction related SFH loans, while 33% are working capital
loans, 30% local debentures and the remaining 2% receivable
backed loans. According to the debt maturity schedule most of the
loans coming due in 2011 and 2012 are linked to construction and should
be repaid with the proceeds from the sale of finished units.
Given high commitments in the beginning of the construction phase,
Brazilian homebuilders generally have substantial working capital requirements
before construction financing kicks in, approximately 20%
of the construction costs on average. This 20% is a use
of the company's working capital, funded mostly through client's
down payment or internal cash generation from finished projects being
delivered. The financing for all the projects launched by Brookfield
has already been committed and will be disbursed according to the construction
progress. The company usually does not start construction without
having secured the respective financing.
At the end of September, 2010 Brookfield had BRL 652 million in
cash and marketable securities on its balance sheet, BRL 767 million
in ST debt and working capital consumption of BRL 250 million per quarter
on average. The majority of the ST debt is comprised by SFH loans
directly linked to construction that will be repaid at the end of each
project as well as working capital loans that will be extended with a
BRL 300 million 4 to 5-year debenture. Most of the working
capital requirements will be financed by the BRL 2.2 billion in
contracted SFH loans plus BRL 1.2 billion already approved by the
local banks. The company also has BRL 965 million in receivables
from finished units that could be used as an alternative source of liquidity.
In January 2009 the company raised BRL 200 million in an equity offering.
The offering was guaranteed by Brookfield's main shareholder BAM,
demonstrating its commitment to Brookfield. In November 2009,
the company raised another BRL 665 million in an equity offering to the
The company's financial policy requires a minimum cash level of
BRL 500 million and net debt no greater than Shareholders' Equity.
SFH loans and other construction loans are secured and represent 46%
of Brookfield's capital structure, but in a liquidation scenario
the company would have enough assets to more than cover all of the secured
and unsecured debt.
The stable outlook takes into consideration that Brookfield will continue
to maintain adequate liquidity on its balance sheet to execute its launched
projects and growth plans, preserving a minimum cash balance to
face weaker economic environments and be able to manage its debt obligations
during a downturn in the homebuilding industry. The stable outlook
also assumes that BAM will remain the largest shareholder of the company
demonstrating its commitment to Brookfield's operations.
Brookfield's rating or outlook could experience upward pressure if the
company is able to further diversify its landbank outside the state of
São Paulo, and at the same time maintain its leverage metrics
and increase profitability as well as interest coverage. Quantitatively,
positive pressure could arise from an increase in gross margin to the
upper 30% (33.7% in the last twelve months ended
in September 2010), maintenance of total debt to capitalization
in the low 40% range (40.8% in the last twelve months
ended in September 2010), and an increase in interest coverage (EBIT
to Interest expense) to above 4.5 times (3.2 times for the
last twelve months ended in September 2010) on a sustainable basis.
Brookfield's ratings could be downgraded if Total Debt to Capitalization
increased above the mid 50% range (40.8% in the last
twelve months ended in September 2010) on a sustainable basis or if the
company were to face a significant deterioration in its liquidity profile
due to a downturn in the homebuilding industry or due to excessive dividend
payout that could instead be used in the down payment of debt or in the
build up of a liquidity cushion. Negative pressure could arise
if the company's cash balance decreases to a level that would not be sufficient
to meet the company's short term financial obligations and minimum working
capital requirements or in case of a breach in the company's internal
leverage and minimum cash policies.
The principal methodology used in this rating was Global Homebuilding
Industry published in March 2009.
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 differ from Moody's global scale ratings in that they are not globally
comparable with the full universe of Moody's rated entities, but
only with NSRs for other rated debt issues and issuers within the same
country. NSRs are designated by a ".nn" country
modifier signifying the relevant country, as in ".br"
for Brazil. For further information on Moody's approach to national
scale ratings, please refer to Moody's Rating Implementation Guidance
published in August 2010 entitled "Mapping Moody's National Scale
Ratings to Global Scale Ratings."
Headquartered in Rio de Janeiro, Brookfield Incorporações
S.A. is a vertically integrated real estate developer with
activities focused mainly in the states of São Paulo, Rio
de Janeiro, Santa Catarina and the mid-west region of Brazil
including the Federal District, it develops, builds and sales
residential projects in virtually all price segments as well as office
buildings. The largest shareholder is Brookfield Asset Management
(Baa2/STA) with an indirect stake of 42.6% of the shares.
During the last twelve months ended in September 2010 the company had
BRL 2.85 billion in net revenues.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
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on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
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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/Aa3.br rating to Brookfield
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