TEXT - Fitch cuts Urbi Desarrollos Urbanos, S.A.B. de C.V. ratings
March 1 - Fitch Ratings has downgraded the following ratings for Urbi Desarrollos Urbanos, S.A.B. de C.V. (Urbi): --Foreign currency Issuer Default Rating (IDR) to 'CCC' from 'B'; --Local currency IDR to 'CCC' from 'B'; --National long-term rating to 'CCC(Mex)' from 'BBB-(Mex)'; --US$150 million senior notes due 2016 to 'CCC/RR4' from 'B/RR4'; --US$300 million senior notes due 2020 to 'CCC/RR4' from 'B/RR4'; --US$500 million senior notes due 2022 to 'CCC/RR4' from 'B/RR4'; --MXN600 million in Certificados Bursatiles (CBs) due in 2014 to 'CCC(mex)' from 'BBB-(mex)'; --National short-term ratings to 'C(mex)' from 'F3(mex)'. KEY RATING DRIVERS The rating downgrades reflect a substantial deterioration of Urbi's liquidity during 2012, which has heightened the risk of default. Urbi had a negative free cash flow (FCF) of MXN7.8 billion during 2012 primarily as a result of increasing working capital requirements that resulted from growing inventory levels and accounts receivables. Fitch's FCF calculation considers cash from operations less capital expenditures and dividends. As of Dec. 31, 2012, Urbi had MXN2.1 billion of cash and marketable securities. This figure is a sharp deterioration from MXN5.5 billion as of Dec. 31, 2011. The company has covered its cash drain with incremental debt increases. Over the 12-month period ending Dec. 31, 2012, gross debt climbed to MXN19.9 billion from MXN14.9 billion. The company's gross leverage (total debt over LTM EBITDA) at year-end was 5.4x, with net leverage of 4.9x. Without external funding, the company's cash position will not support another quarter of high cash burn similar to what it experienced in the fourth quarter of 2012. RATING SENSITIVITY Fitch believes the factors that have contributed to cash flow deterioration in the past--a challenging regulatory environment and changing demand characteristics for the industry--are unlikely to change in the near term, and may even escalate. A significant reduction in inventories and receivables could stabilize the company's financial situation. Another factor that could contribute to a positive rating action would be the occurrence of a scenario in which the company receives extraordinary financial support from the controlling shareholders or third parties, including but not limited to the Mexican government. While quite uncertain where this support could come from, extraordinary financial support could provide additional time for the company to right size its business and to liquidate assets to generate cash, to the extent feasible.
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