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Rating Action:

Moody's changes Javer's outlook to stable; affirms B1 rating

29 Oct 2019

New York, October 29, 2019 -- Moody's Investors Service ("Moody's") has changed today Servicios Corporativos Javer, S.A.B. de CV ("Javer")'s outlook to stable from positive. At the same time, Moody's affirmed the B1 senior unsecured rating on Javer's 2021 notes. The action was prompted by our view that a weaker than anticipated operating environment will prevent Javer from de-levering through mid-2020.

Outlook Actions:

..Issuer: Servicios Corporativos Javer, S.A.B. de CV

....Outlook, Changed To Stable From Positive

Affirmations:

..Issuer: Servicios Corporativos Javer, S.A.B. de CV

....Senior Unsecured Rating, Affirmed B1

RATINGS RATIONALE

"The change in outlook was triggered by our view that more challenging conditions in the Mexican housing sector and overall economy will prevent Javer from de-levering as fast as we were originally anticipating," says Sandra Beltrán, a lead analyst at Moody's.

"In our view, Javer's measures to improve its capital structure and adequate liquidity will continue to support its ability to navigate through challenging economic conditions, but credit metrics will remain commensurate within the B1 rating for longer," added Beltrán.

In September 2018, we had changed Javer's outlook to positive from stable reflecting our expectation that de-leveraging would continue through mid-2020 as a consequence of a strong operating performance and lower working capital needs. Since then, Mexican economic growth has deteriorated. A lack of policy coherence is undermining economic sentiment and investor confidence, holding back Mexico's economic prospects through 2020. Residential construction, that remained resilient in recent years has recently deteriorated, affected by the cancellation of the housing subsidies' program and delays in construction permits. Amid this environment, Javer has reported weaker than anticipated performance. In the nine months ended in September 2019, units sold declined 21.6% year-over-year and revenues fell 14.9%. Since Javer has been shifting its product offering towards higher priced units, it was able to maintain its margins. For the first nine months of 2019, Javer even reported improved gross margin of 27.2% from 25.8% the prior year. Nevertheless, cash generation will remain below expectations. The company recently downsized its 2019 EBITDA growth guidance to 0% - 2% from 2.5% - 5%.

Offsetting the risk of further deterioration is Javer's adequate liquidity, which in our view is key for Javer to navigate through tougher market conditions. As of September 2019, cash in hand was MXN515 million, well above the MXN127 million in short term debt. Although land purchase needs will continue to be high, there is some flexibility in working capital considering recent inventory build-up. In the fourth quarter, Javer expects the openings of six new developments. Moreover, Javer recently signed a new credit and guaranty agreement. The proceeds will be used to redeem the 2021 senior notes outstanding. The new debt will be 87% denominated in MXN pesos, virtually eliminating foreign currency risk and reducing refinancing risk as it will amortize in partial installments through 2025.

Javer's B1 senior unsecured rating continues to reflect its leading presence in relevant markets such as the states of Nuevo Leon and Jalisco, which include Mexico's second and third-largest metropolitan areas. The rating also considers its ability to modify its product mix amid changing operating conditions.

The stable outlook reflects our view that Javer's credit profile will remain resilient amid more challenging operating conditions due to its strong market position and flexible product portfolio. As current projects ramp up, cash generation should strengthen allowing Javer to resume debt reduction in late 2020 . The stable outlook also considers our expectation that liquidity will remain adequate with internal and external resources being enough to cover cash needs and timely address debt maturities.

Javer's rating could be downgraded if credit metrics weaken beyond current levels because of unanticipated challenges in reaching sales targets or because of missteps in land acquisition strategy. A drop in profitability because of a deterioration in the company's product mix, coupled with cost pressures, could also result in a rating downgrade. Quantitatively, if gross margin declines below 20% and Debt/capitalization remains above 55%, without prospects to de-lever, the B1 rating could come under pressure. Any sign of liquidity deterioration could also trigger a negative rating action.

Conversely, ratings could be upgraded if Javer is able to maintain the current profitability levels, while reducing leverage below 45% of debt/total capitalization (from 48% as of September 2019). A positive rating action would also require liquidity to remain strong.

Headquartered in the city of Monterrey, Mexico, Servicios Corporativos Javer, S.A.B. de CV is one of the country's largest house developers, specializing in the construction of low- and middle-income housing. The company operates in the states of Nuevo Leon, Aguascalientes, Tamaulipas, Jalisco, Queretaro, Quintana Roo, the state of Mexico and Mexico City. Javer is the largest supplier of Mexican Workers' Housing Fund (Infonavit) homes in the country and in the states of Nuevo Leon, Aguascalientes, Jalisco and Estado de Mexico. For the 12 months ended September 30, 2019, Javer reported revenue of around MXN7,383 million and a gross margin of 27.1%.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sandra Beltran
VP - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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