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Rating Action:

Moody's assigns a Ba3/A2.br rating to JHSF and Ba2/Aa3.br to its proposed BRL 270 million senior secured debentures

 The document has been translated in other languages

18 Nov 2010

Approximately BRL 270 Million of Debt Securities Affected

Sao Paulo, November 18, 2010 -- Moody's América Latina has assigned first-time Ba3 local currency and A2.br Brazil national scale corporate family ratings to JHSF Participações S.A. ("JHSF") and Ba2/Aa3.br to its proposed BRL 270 million 10-year senior secured debentures. The proceeds will be used to finance the construction of the company's projects and to reinforce their cash position. The outlook for the ratings is stable.

Ratings Assigned:

-Corporate Family Rating: Ba3/A2.br

-BRL 270 million senior secured debentures: Ba2/Aa3.br

RATINGS RATIONALE

"JHSF's Ba3 rating reflects its strong brand name and track record in the Brazilian higher income construction market, as well as in the construction and rental of shopping malls and office buildings", said Moody's Analyst, Marcos Schmidt. "The rating also considers the company's good profitability, in part derived from its diversification into the real estate rental business, and relatively strong debt protection metrics when compared to its local peers. JHSF's conservative financial management and liquidity policies that lead to high cash reserves on its balance sheet are also positives to the rating", added Schmidt.

On the other hand, JHSF's rating is constrained by the company's pro-forma higher leverage after the issuance of new indebtedness and its small size when compared to local and global peers. There is also an element of concentration risk due to their focus on a few projects mainly located in the state of São Paulo, targeting mostly higher income homebuyers. Unlike its peers, JHSF's projects are more focused in higher income units priced above BRL 500 thousand, and for that reason the majority of its clients cannot benefit from cheaper loans or FGTS ("Fundo de Garantia do Tempo de Serviço") severance funds or government programs such as Minha Casa Minha Vida.

JHSF's main shareholders are its founder and chairman, Fábio Chimeti Auriemo (40.7%) and his son and CEO José Auriemo Neto (also 40.7%). The remaining balance (approximately 18.6%) is free float. Despite being managed by its founders, all other executive directors and board members are professionals hired from the market. The company is traded on the stock market under the Novo Mercado corporate governance standards and therefore 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 560 million of net revenues in the LTM ending in September, 2010, JHSF is small when compared to its larger rated competitors, such as PDG (Ba2/Aa3.br/Sta, with pro-forma sales of BRL 3.3 billion), Cyrela (Ba2/Aa2.br/Sta, BRL 2.7 billion) and Gafisa (Ba2/A1.br/Neg, BRL 2.0 billion). The limited size reduces its scale, bargaining power and diversification, both in terms of product price point and geography. On the other hand, JHSF has stronger cash flow metrics than its larger peers given the differentiated payment schedules where the homebuyers pay on average 60% of the unit value before the end of construction. The company's landbank is concentrated on 9 projects, mostly in the state of São Paulo, comprising 85.4% of the total landbank. São Paulo represents 45% of the Brazilian real estate market.

Despite its fast growth, mainly organically, JHSF has been able to maintain an adequate capital structure and coverage with total adjusted Debt to Book Capitalization of around 39.3% in September 2010 and EBIT to Interest of 2.4 times. However, leverage will increase to around 47.9% after the issuance of the BRL 270 million debentures. JHSF's pro-forma capital structure is comprised of working capital (23.4%) and BNDES loans related to construction (6.8%), unsecured debentures (38.9%) and secured debentures (29.9%).

With high commitments in the beginning of the construction phase, Brazilian homebuilders generally have substantial working capital requirements before financing begins. Given the high purchasing power of its clients however, JHSF , is able to sell its units with 30% down payment and receives 30% more during the construction process thereby reducing the working capital consumption. The company has been financing their clients for the remaining 40% for two years. It is important to mention that the apartment is transferred to the homebuyer only when the remaining 40% is fully paid down, either with cash or through a mortgage signed with a commercial bank.

At the end of September, 2010, JHSF had BRL 522 million in cash and marketable securities on its balance sheet. In August 2010, the company raised BRL 250 million in senior unsecured local debentures due in August 2015 with the objective of lengthening the company's debt maturity profile and reinforcing its cash position. Also with the objective of strengthening its liquidity position, the company is now proposing BRL 270 million in 10-year senior secured debentures. With the new issuance, the company's cash balance would increase to around BRL 792 million leaving it in a comfortable position to meet its ST debt maturity commitments of BRL 127 million and working capital requirements (historically around BRL 100 million a year but expected to increase to around BRL 250 million a year over the next two years given the higher volume of launches in the company's pipeline). The company has BRL 500 million in committed lines for construction already tied to projects in their pipeline. These lines of credit were signed with both government and commercial banks and will be disbursed during the construction process.

The company has an internal commitment of maintaining a minimum cash balance of BRL 200 million or large enough to cover at least two years of construction costs of its on-going projects. But those are not formal written polices approved by the board of directors.

The proposed senior secured debentures are rated one notch higher than JHSF's CFR given the high proportion of unsecured debt and the quality of the collateral being offered. The collateral includes a first priority perfected security interest under the Brazilian law ("alienação fiduciária") in the receivables from all lease contracts originated in Shopping Cidade Jardim mall and a second priority mortgage of the same mall, which according to a third party appraisal, is valued at BRL 600 million. The mall currently generates an estimated value of BRL 40 million a year. The first priority mortgage on the mall belongs to a BRL 61 million BNDES loan due in November 2014, once this amortizing loan is fully repaid the second priority mortgage becomes a first priority mortgage releasing the alienação fiduciária from the receivables. The receivables although will still flow through an escrow account held by the fiduciary agent until the final payment of the debentures in 2020 and need to meet a minimum pre-established amount that starts at BRL 24 million per year in 2010 and increases every year up to BRL 32 million by the end of 2020. This amount will be measured quarterly by the fiduciary agent. A breach in the minimum amount for two quarters in a 12 month period would be considered as an event of default.

A meaningful increase in the amount of secured debt in the company's capital structure could result in a downgrade of JHSF's secured debt rating.

The stable outlook takes into consideration that JHSF will maintain adequate liquidity on its balance sheet to execute its launched projects and growth plans while preserving a minimum cash balance to face weaker economic environments and honor its debt obligations during a downturn in the homebuilding industry.

JHSF's rating or outlook could experience upward pressure if the company is able to increase the share of its shopping malls and office rental business in its revenue base, geographically diversify its landbank, and at the same time reduce its leverage metrics to pre-debenture issuance levels. Quantitatively, positive pressure could arise from an increase in the revenue share from shopping malls and office rentals to at least 20% (9.8% for the last twelve months ended in September 2010) of net revenues, reduce total debt to capitalization below 40% (47.9% pro-forma in the end of September 2010), and increase interest coverage (EBIT to Interest expense) to above 4.5 times (2.4 times for the last twelve months ended in September 2010) on a sustainable basis.

JHSF's ratings would likely be downgraded if Total Debt to Capitalization increased above 50% (47.9% 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 an excessive dividend payout that could instead be used in the down payment of debt. Negative pressure could arise if the company diverged from its internal minimum cash policy mentioned earlier.

JHSF's Ba3 local currency corporate family rating reflects its global default and loss expectation, while the A2.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 A2.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 JHSF 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.

Headquartered in São Paulo and established in 1972, JHSF is a holding company with activities in the residential and office development of mixed-use, luxury projects, development and management of shopping malls and office rentals. In 2007, the company joined the luxury hotel business with the acquisition of Hotel Fasano. JHSF is one of the leaders in the luxury residential segment in the state of São Paulo and over the past 38 years they developed more than six million square meters of real estate projects, particularly in the city of São Paulo.

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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Moody's America Latina Ltda.
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Moody's assigns a Ba3/A2.br rating to JHSF and Ba2/Aa3.br to its proposed BRL 270 million senior secured debentures
No Related Data.
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