TEXT - S&P rates Servicios Corporativos Javer S.A.P.I. de C.V.
Overview -- Mexico-based homebuilder Javer announced it had reached an agreement to acquire ICA's homebuilding assets in Mexico (ViveICA) through an exchange of shares.We believe successful completion of this transaction could strengthen Javer's business profile due to a wider geographic scope, stronger market position and larger economies of scale. -- We are assigning our 'B+' corporate credit rating to Javer. -- The positive outlook reflects that we may raise the ratings if the integration of acquired assets of ViveICA into Javer is successful, resulting in improving consolidated operating profitability and stronger cash flows. Rating Action On Dec. 21, 2012, Standard & Poor's Ratings Service assigned its 'B+' corporate credit rating to Servicios Corporativos Javer S.A.P.I. de C.V. (Javer). The outlook is positive. Rationale The rating on Javer reflects the concentration of mortgage originations for the company's homes with Infonavit, which provides credit that's somewhat subject to political risk. Javer will improve its geographic diversity and scale following its acquisition of ViveICA's assets, a subsidiary of Empresas ICA S.A.B. de C.V.'s (ICA; BB-/Stable/--), ViveICA. However, we believe the company will remain exposed to a competitive and mature housing industry in Mexico, especially in the central states of the country. Javer will also face integration risks, as it expects to collect significant efficiency gains from acquired assets, but might be a challenge to realize. The rating incorporates Javer's adequate liquidity and sound capital structure due to low debt maturities in the next several years and the high brand recognition in the regions where it operates. We assess Javer's business risk profile as "weak" and its financial risk profile as "aggressive." Javer recently announced that it will acquire homebuilding assets and operating liabilities of ViveICA, a subsidiary of Mexico-based engineering and infrastructure company, ICA in an all-share transaction, subject to customary closing conditions and regulatory approvals. We believe the integration of ViveICA's operations will allow Javer to expand its operations in the central region of the country, especially in the state of Mexico, where ViveICA holds a relevant market position and brand recognition. ViveICA has a land bank to be developed over the next several years, preventing Javer from spending on new land. This helps Javer to diversify from its existing concentration in northern Mexico without incurring into a higher financial leverage as the acquisition incorporates a 23% exchange of shares. Currently, 50% of the company's sales come from the state of Nuevo Leon. We estimate that during the next couple of years, this contribution could decrease to about 35%, whereas the one from the state of Mexico could increase to about 12%. We expect these two markets with positive growth fundamentals, together with Jalisco and Queretaro, also to remain the company's key markets, significantly improving its geographic diversification. In our opinion, the acquisition, if successfully completed, will transform Javer into the third-largest homebuilder in Mexico. As our base case, we assume volume sales of nearly 26,500 units by 2013. Although Javer's sales grow significantly following the acquisition, we believe the company will maintain a prudent strategy going forward, with mid-single digit revenue growth rates on a pro forma basis, as we expect it to maintain a strong focus on improving operating margins and maintaining neutral to positive free operating cash flows at least through the next two years. We believe moderate growth will enable Javer to successfully cope with sluggish demand in the northern region of the country, with regional allocation and availability of subsidies and with fierce competition in the central states. For the 12 months ended Sept. 30, 2012, Javer posted EBITDA margin of 16% compared to 20% a year before, reflecting a stronger focus on the low-income segment and an aggressive pricing strategy. We project consolidated operations to be initially weaken from the consolidation of ViveICA's comparatively lower-margin projects, reducing EBITDA margin to about 15% in 2013. However, as Javer captures economies of scale, further improves ViveICA's existing projects, and starts developing its enlarged land bank, we assume, as our base case, that EBITDA margin will be in the 18%-20% range by 2014. As of September 2012, its total debt was MXN3.138 billion (adjusted for leases and pension benefits), total debt to EBITDA of 3.7x, and FFO to total debt of 15%, compared with 3.3x and 15%, respectively, a year before. Total debt is mostly comprised of $210 million senior notes due 2021. Javer hedges for exchange risks over the next five years to protect itself from currency mismatches. We project total debt to EBITDA will be around 3.5x for 2013 and 3.0x for 2014, considering that Javer will assume ViveICA's MXN600 million debt. We expect the company to refinance this debt through a term loan, upon the closing of the transaction. We estimate that additional EBITDA from new assets would be sufficient to offset additional debt,and improve key credit metrics in the next few quarters. Liquidity We assess Javer's liquidity as adequate. As of Sept. 30, 2012, the company had MXN346 million in cash and MXN54 million in short-term debt. We believe that its cash position, along with FFO of about MXN500 million for 2013, will cover by at least 1.2x its working capital and capex requirements for the next 24 months. Our analysis considers the benefit of land reserves from the proposed transaction, significantly reducing capital committed to land acquisition in the next few years. In our view, Javer will be challenged to align its construction cycle with its collections, especially once the company gains a larger scale. Currently, Javer does not have large maturities, as it successfully exchanged most of its notes due 2014 for new notes due 2021. Our liquidity analysis considers that the company will successfully refinance ViveICA's MXN600 million assumed debt into a long-term bank facility. The acquisition of ViveICA's low-income housing operations is planned to close under an exchange of issued shares representing 23% ownership interest in Javer, therefore, it does not represent any cash outflow. We believe Javer has comfortable headroom on its financial covenants, especially after the company amended them to interest coverage ratio above 2.5x during its notes exchange. Outlook The positive outlook reflects our expectation that the successful integration of ViveICA will lead to an improved business profile due to a stronger market position and further geographic diversification. We could raise the ratings if the successful integration results in higher profitability after some deterioration in 2013, resulting in positive cash flows. In contrast, an aggressive growth strategy or deterioration in the consolidated operations, leading to negative cash flows and increased debt, could result in a downgrade. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors for Global Corporate Issuers, Sep. 28, 2011 -- Key Credit Factors: Global Criteria For Single-Family Homebuilders, Sept. 27, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List New Rating; CreditWatch/Outlook Action Servicios Corporativos Javer S.A.P.I. de C. V. Corporate Credit Rating B+/Positive/--
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