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Rating Action:

Moody's assigns a Ba2/Aa3.br rating to Brookfield

28 Feb 2011

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.

Ratings Assigned:

-Corporate Family Rating: Ba2/Aa3.br

RATINGS RATIONALE

"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 market.

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.

REGULATORY DISCLOSURES

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.

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.
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

New York
Brian Oak
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
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SUBSCRIBERS: 212-553-1653

Moody's America Latina Ltda.
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Moody's assigns a Ba2/Aa3.br rating to Brookfield
No Related Data.
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