Thursday, 22 January 2009

Fitch Downgrades Brazilian Real Estate Companies Cyrela, Gafisa; Outlook on Industry Changed to Negative

Fitch Ratings cut the ratings of several Brazilian homebuilders (including those of No. 1 Cyrela and rival Gafisa) on expectations that real estate developers are bracing for a challenging operating environment and financial pressures in for the next two years. A ''slowing Brazilian economy, limited access to real estate credit, higher cost of credit, weakening of demand and consumer confidence, lower income and higher unemployment rates´´ will negatively impact the industry's fundamentals.

Ratings may be further lowered ''in the case of a prolonged downturn that includes a scarcity of long-term funding sources to finance these once-rapidly growing businesses.´´ One of the issues at question is liquidity: with the ongoing dearth of credit taking place and banks wary of lending and instead seeking to preserve capital, borrowing costs are rising. Refinancing will become more challenging to these companies -- see the examples of the many real estate developers that had to sell out to rivals as they ran out of funding to continue expansion. One of them was MB Engenharia, which was acquired by Brascan Properties in April 2008. Others are moving forward, seeking to raise cash or merge to avert going off: Trisul issued a five-year 200 million local bond last July; Even was pumped 150 million reais in capital injection last September, and; Company was taken over by Brascan Properties. Fitch said in this respect:
''Consolidation of the Brazilian homebuilding sector is a real possibility as the downturn continues. During the second semester of 2008, several ownership changes occurred including the acquisition of Tenda SA by Gafisa, in which Equity International increased its share in Gafisa to 19 percent from 14 percent. Also, the merger of Company and Brascan has already been completed. The 3 billion reais line of credit from BNDES announced in the last quarter of 2008, providing funds for the acquisition of projects of companies under difficulties, should favor market consolidation on behalf of the larger and most established Brazilian homebuilding companies, which is positive for the industry.´´
Fitch also warned of a certain fatigue registered in demand and activity in the industry. It says that ''growth of supply and the willingness to buy new homes observed in the last couple of years has recently decreased.´´ And despite fewer project launches, Ebitda and margins likely will decrease while inventory of unsold homes, offices and warehouses will rise. In the third quarter, homebuilders experienced a decline in the total future sales value of projects launched to 2.9 billion reais from 4.6 billion reais in the second quarter. The writedowns were awful.

Finally, leverage will likely remain under pressure in 2009. Total debt excluding Housing Financial System (SFH) loans compared to the industry's Ebitda (a measure of debt-servicing capacity) was 2.9 times debt in September, compared with 2.3 in June 2008. The increased use of cash to cover ''construction, advertising and operational costs´´ will affect the indicator even more, Fitch said. Liquidity position measured by cash to short term debt dropped to an average of 2.4 by September 2008, versus 3.4 in June.

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