-- 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.
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.
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.
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
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.
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,
-- 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
New Rating; CreditWatch/Outlook Action
Servicios Corporativos Javer S.A.P.I. de C. V.
Corporate Credit Rating B+/Positive/--