RPT-Fitch: Credit differentiation increases among Brazilian homebuilders
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Dec 18 (Reuters) - (The following statement was released by the rating agency)
Market fundamentals for Brazilian homebuilders are expected to be stable in 2014, reflecting a satisfactory business environment due to: continued support from the government; low unemployment rates; low delinquency of real estate credit; access to local debt capital markets and long-term credit lines specific to the sector; and adequate but more selective demand, according to a new Fitch Ratings report. Fitch expects lower negative rating actions for the Brazilian homebuilders in 2014, compared to 2012 and 2013.
Strategic decisions to improve internal controls and processes adopted by the companies since the end of 2012 will gradually reflect on the operating performance, given the sector's long construction cycle. 'For 2014, profitability is expected to moderately improve as lower margin projects are concluded', according to Fernanda Rezende, a Director at Fitch. 'Fitch's ratings reflect the increasing differentiation in the credit quality of the various homebuilders, as some companies outperformed others during the difficult past two years.'
Fitch projects positive cash flow from operations (CFFO) in 2014 for the majority of the companies. 'Cash burn rates should continue to reduce, following the completion of an aggressive growth cycle,' according to Rezende. 'Brazilian homebuilders' operational cash flow should benefit from high volume of project deliveries and improved process to transfer the receivables from homebuilders to banks.'
'Homebuilders continue to strongly depend on long-term credit lines and high corporate debt maturities in 2014 and 2015', according to Jose Romero, a Director at Fitch. 'Considering the companies rated by Fitch, about BRL10 billion of corporate debt (equivalent to 37% of total debt) is due in the next couple of years'.
Homebuilders' debt levels increased due to strong business growth and lower than expected cash flow generation during the past few years. The expectation of a gradual recovery in operating margins combined with positive CFFO should contribute to leverage reduction for some companies.
The main concerns for the homebuilding industry include additional upward cost revisions, a growing level of sales contract cancellations, higher overall inventory levels, the potential increase in delinquency rates, and high debt refinancing requirements.
For more information, a special report titled '2014 Outlook: Brazilian Homebuilders' is available on the Fitch Ratings web site at www.fitchratings.com.
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