December 21, 2012 / 10:05 PM / 5 years ago

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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