(The following was released by the rating agency)
-- We believe that Brazil-based developer Even will improve its cash generation in the next few quarters and maintain a relatively prudent financial policy.
-- We are affirming our 'BB-' global scale corporate credit rating with stable outlook on Even.
-- We are revising our outlook on the 'brA-' national scale rating to positive from stable.
-- The positive outlook reflects our expectation that Even's financial profile will further strengthen during the next 18 months.
On Nov. 8, 2012, Standard & Poor's Ratings Services revised its outlook on Even Construtora e Incorporadora S.A. (Even) 'brA-' national scale rating to positive from stable. At the same time, we affirmed our 'BB-' global scale corporate credit rating on the company. The outlook on this rating remains stable. Rationale The positive outlook on the national scale rating reflects our expectation that Even's financial profile will strengthen during the next 18 months, as the company continues to prioritize profitability and cash flows generation in 2012 and 2013. Despite its relatively smaller size and narrower operating scope as a niche player in the housing sector, we view Even's strategy as prudent compared with that of many of its competitors and more consistent in terms of execution, growth targets, geographical expansion, and venture into new business lines. However, its leverage metric has been rising in the past year or so, and we don't project it to decline significantly in the next couple of years. The ratings on Even reflect our assessment of its "aggressive" financial risk profile and "weak" business risk profile.
We believe that during the next few years, Even will deploy its inventories, as seen in 51% of its sales coming from inventory during the first half of 2012, compared to 43% a year before. Our base-case scenario considers that Even should generate potential sales value (PSV) of R$2.5 billion in 2012 and R$2.65 billion in 2013, which should translate into net revenue growth of about 4% and 8%, respectively. Although we expect Even's adjusted new unit starts pace to be in line with slower unit sales, reflecting more stable sales trends for homebuilders in Brazil, we believe that sales from projects completed during 2011 and 2010 should raise its cash flow during the next two to three years.
We expect Even's EBITDA margin, which was at 18% during the first half of the year, to slightly increase by the end of 2012 and continue improving gradually during the next few years, as projects launched in 2012--with higher gross margins--gain a larger weight in sales. Currently 82% of the company's total inventory is comprised of units launched in 2011 and the first half of 2012, which should improve margins. Additionally, Even executes 95% of its construction projects itself, allowing for a high degree of vertical integration and more rigid cost controls.
The company is likely to improve cash flow generation due to the following factors:
-- Falling inventories, focusing on maximizing the pace at which units are developed and sold (inventory sales to supply ratio was of 20.4% as of June 30, 2012);
-- Improving cash collections on delivered units, projected to be around 90 days; and
-- Keeping sales cancellations and delinquency at low levels, allowing for a strong cash collection on existing receivables.
This will lead to neutral free operating cash flow generation in 2012 and about R$185 million in 2013. We expect Even's debt level to remain relatively unchanged, as its expected cash flows should be sufficient to fund working-capital requirements, including land purchases.
We expect this will lead to slightly stronger credit metrics during the next 24 months: total debt to EBITDA of about 4.0x and funds from operations (FFO) to total debt of about 20%, compared with 4.1x and 18%, respectively, for the 12 months ended June 30, 2012. For the units being completed and delivered, we expect Even to manage more bureaucratic procedures in permits and licenses well, so that cash inflows from these completed units keep improving. During the first half of 2012 the bulk of Even's sales came from middle- and high-end housing; however, we believe the company will continue to explore projects in the higher-end of the affordable housing segment, which has a faster working capital cycle and provides larger synergies. Nevertheless, this is also a more volatile market that operates under tighter operating margins. As of this same date, PSV of land bank was of R$5.4 billion, out of which 40% corresponded to affordable segment.
We assess Even's liquidity as "adequate," based on our estimates that the company's sources of liquidity will cover its uses by 1.6x during the next 12 months and 2.1x in the 24 months. Our base-case scenario for the following 12 months considers as key sources of liquidity of R$485 million in cash as of June 30, 2012, our expectation of R$255 million in FFO, recently issued R$150 million debentures, and prearranged funding from Sistema Financiero Habitacao in form of construction loans of more than R$850 million (estimated at about 60% of projected ex-land construction cost). We consider uses of liquidity as working capital, capital expenditures, and dividend disbursements of about R$460 million and maturities of R$620 million (including payables of land purchases). On Oct. 3, 2012, Even issued a five-year tenor debenture of R$150 million, which it will use to repay R$128 million of previous issues maturing in the short term (R$32 million were already amortized in October). The company will allocate the remaining R$22 million to the amortization of production financing. With this issuance, the company improved its capital structure through the extension of average life of its debt and reducing its financing cost.
The stable outlook on the global scale rating reflects our expectation that Even's financial policy and key strategies will lead to improved credit metrics in the next few quarters, thus offsetting the weaker metrics in 2012. We could raise the global scale rating if the company achieves positive FOCF generation within the next 12 months, resulting in total debt to EBITDA of around 2.0x. We could raise the national scale rating if FOCF turns positive in 2013, allowing for credit metrics to improve gradually and cash to remain above R$450 million. We could revise the outlook on the national scale rating back to stable if the company is unable to cash in on delivered units as expected, causing a longer-than-expected working capital cycle that would lead to a higher-than-expected leverage metric.
Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Global Criteria For Single-Family Homebuilders, Sept. 27, 2011
-- Corporate Ratings Criteria 2008, April 15, 2008 Ratings List Ratings Affirmed
Even Construtora e Incorporadora S.A.
Corporate Credit Rating BB-/Stable/--
Ratings Affirmed; CreditWatch/Outlook Action
Even Construtora e Incorporadora S.A.
Corporate Credit Rating
Brazilian Rating Scale brA-/Positive/-- brA-/Stable/--