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.
-Corporate Family Rating: Ba3/A2.br
-BRL 270 million senior secured debentures: Ba2/Aa3.br
"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
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
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
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.
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.
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on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
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Please see ratings tab on the issuer/entity page on Moodys.com
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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 Ba3/A2.br rating to JHSF and Ba2/Aa3.br to its proposed BRL 270 million senior secured debentures
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