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Rating Action:

Moody's assigns a Ba3/A2.br rating to Even and its proposed BRL 250 million senior unsecured debentures

19 Jan 2011

Approximately BRL 250 million of Debt Securities Affected

Sao Paulo, January 19, 2011 -- Moody's América Latina has assigned first-time Ba3 local currency and A2.br Brazil national scale corporate family ratings to Even Construtora e Incorporadora S.A. ("Even") and Ba3/A2.br to its proposed BRL 250 million 5-year senior unsecured debentures. The proceeds will be used to pay down debt coming due over the next two years extending the company's debt maturity schedule and to finance Even's expansion plans. The outlook for the ratings is stable.

Ratings Assigned:

-Corporate Family Rating: Ba3/A2.br

-BRL 250 million 5-year senior unsecured debentures: Ba3/A2.br

RATINGS RATIONALE

"Even's Ba3 rating reflects its strong brand name and track record in the construction of apartments for the middle income families, especially in São Paulo's metropolitan area.", said Moody's Analyst, Marcos Schmidt. "The rating also considers the company's size and market share in its geographic niche market, good profitability, in part derived from its low exposure to lower income housing, and adequate debt protection metrics that compare well to its local rated peers. Even has conservative financial policies that result in adequate liquidity which is also positive to the rating", added Schmidt.

On the other hand, Even's rating is constrained by the company's smaller size when compared to local and global rated peers that diminishes the company's bargaining power acquiring land and raw materials, relatively high pro-forma leverage measured by debt to capitalization, small landbank for a company focused in a region with low availability of new plots of land and many building restrictions like São Paulo's metropolitan area, and concentration risk related to the reduced geographic diversification.

Even's shareholders are comprised of the founding members with Carlos Eduardo Terepins holding a 6% stake, Luis Terepins 3%, and FIP Genoa 16.4%. Other shareholders include board members and executive officers with a combined 1% stake, and the remainder (73.7%) free floating. FIP Genoa is an Investment vehicle controlled by Spinnaker, an asset manager based in London focused on investments in emerging markets with approximately USD 5.8 billion under management. The company is traded in the stock market under the Novo Mercado corporate governance standards, the highest level in Brazil, it needs to comply with many corporate governance practices such as: 100% voting shares, 100% Tag along, minimum 5 board members of which 20% must be independent, auditing committee, ethics code, share trading policy and disclosure policy.

With some BRL 1.7 billion in net revenues in the LTM ending in September, 2010, Even is still small when compared to its larger, higher rated competitors, such as Cyrela (Ba2/Aa2.br/Sta) with BRL 4.7 billion, PDG (Ba2/Aa3.br/Sta) with BRL 4.1 billion, and Gafisa (Ba2/A1.br/Sta) with BRL 3.7 billion, reducing its scale, bargaining power and diversification both in terms of product and geography. The company's landbank is relatively small and concentrated mainly in the São Paulo metropolitan region which make up 32 of the total 72 projects in the landbank and 55% of the BRL 3.6 billion PSV ("Potential Sales Value"). If the countryside of São Paulo is included the contributions increase to 41 projects and 65% of the PSV in the state of São Paulo. On the other hand São Paulo alone represents 45% of the Brazilian real estate market and 34% of the country's GDP.

Even has grown fast since its IPO in 2007, mostly organically. The company has been able to maintain an adequate capital structure and interest coverage with total adjusted Debt to Book Capitalization of 46% in September 2010 and EBIT to Interest of 3.6 times, respectively. Leverage will increase slightly to around 48% after the issuance of the proposed BRL 250 million debentures. Even's pro-forma capital structure is comprised of unsecured debentures (35%), Sistema Financeiro de Habitação ("SFH") (55%) and land financing (10%) that will be converted into SFH loans. Since 75% of the company's units are priced below BRL 500 thousand they can benefit from cheaper government-sponsored SFH funds during the construction and SFH and Fundo de Garantia do Tempo de Serviço ("FGTS") funded mortgages for homebuyers. FGTS is a mandatory employee's severance fund. The employer makes a monthly deposit at Caixa Econômica Federal ("CEF" ) equivalent to 8% of the employee's monthly salary. The funds can be withdrawn for retirement or to acquire an eligible house.

Given high commitments in the beginning of the construction phase, Brazilian homebuilders generally have substantial working capital requirements before construction financing kicks in, 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 Even has already been committed and will be disbursed according to the construction progress. The company will not build any project without having secured the respective financing.

By the end of September, 2010 Even had BRL 550 million in cash and marketable securities on its balance sheet. With the objective of strengthening its liquidity position, the company is now proposing BRL 250 million in 5-year senior unsecured debentures, where the proceeds will be used to pay down BRL 145 million in debentures coming due over the next two years. The balance of the issuance will be utilized in the company's plans to expand operations outside the state of São Paulo. The pro-forma cash balance of BRL 655 million, plus adequate availability under the company's SFH lines, and BRL 3.4 billion in receivables on balance sheet leave the company in a comfortable position to meet its adjusted ST debt maturity commitments of around BRL 336 million. Adjusted ST debt are mostly SFH loans for construction that will be self liquidated with the delivery of the units to the respective homebuyers. Working capital requirements that have consumed around BRL 500 million a year over the past 5 years should turn positive in 2011 with the delivery of an estimated BRL 1.5 billion of PSV in finished units.

While the proposed unsecured debentures will be structurally subordinated to Even's existing secured debt with respect to certain assets, they are rated at the same level as Even's CFR given the fact that most of the secured debt is collateralized by specific real estate projects with no recourse to the company's remaining assets, such as accounts receivables. As a result there is high amount of unencumbered assets that in case of a default should provide good recovery for the unsecured instruments.

The stable outlook takes into consideration that Even will continue to acquire adequate landbank in a timely fashion and 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 honor its debt obligations during a downturn in the homebuilding industry.

Even's rating or outlook could experience upward pressure if the company is able to increase in size in terms of revenues and tangible net worth, improve diversification outside the state of São Paulo and build a larger landbank in strategic locations, and at the same time reduce its leverage metrics. Quantitatively, positive pressure could arise from an increase in availability of strategic landbank to 3.0 years in the current positive cycle of the Brazilian real estate market, (1.8 years in the end of September 2010) total debt to capitalization in the mid 40% range (48% pro-forma in the end of September 2010), and interest coverage (EBIT to Interest expense) above 4.5 times (3.6 times for the last twelve months ended in September 2010) on a sustainable basis.

Even's ratings would likely be downgraded if Total Debt to Capitalization increased above the mid 50% range (48% pro-forma in the end of 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 built 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.

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."

The principal methodology used in this rating was Global Homebuilding Industry published in March 2009.

Headquartered in São Paulo, and established in 1980, Even Construtora e Incorporadora S.A. ("Even") is a real estate developer with activities in the states of São Paulo, Minas Gerais, Rio de Janeiro and Rio Grande do Sul and focus on residential developments with units priced up to BRL 500 thousand. The company is vertically integrated, executing all real estate development phases from the analysis of the prospective land to the construction of the units and sale to the final homebuyer. During the last twelve months ended in September 2010 the company had BRL 1.7 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
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Moody's assigns a Ba3/A2.br rating to Even and its proposed BRL 250 million senior unsecured debentures
No Related Data.
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