Friday, 20 March 2009

S&P Downgrades Six Brazilian Homebuilders on Financial, Demand Concerns; Cut Follows Fitch's January Downgrade


Standard and Poor's cut the credit ratings of Brazil's No. 1 real estate company Cyrela Brazil Realty SA, its closest rival Gafisa SA and four other homebuilders on concern a prolonged decline in demand and financing sources as well as tougher refinancing conditions will lead to financial difficulties. In a report, analyst Reginaldo Takara said the rating actions ''reflect the difficulties being faced by the homebuilders to finance their working capital, the risks of a prolonged contracted sales slowdown, more uncertainties about the sale of the existing portfolio of projects and the trends for the industry in the medium term.´´

Cyrela, majority owned by billionaire Elie Horn, was cut one level to BB- from BB (S&P kept the rating on a stable outlook.) Gafisa, Brazil’s second-largest real estate company and one that has focused very much on high-end and commercial real estate megaprojects, was lowered to brA- from brA (there are ratings in the local scale) with a negative outlook. Gafisa, which has not issued notes abroad as far as I am concerned, has sold notes in the domestic markets. The move means that the situation for Gafisa might relatively be more challenging than for Cyrela. S&P also downgraded Rossi Residencial, MRV Engenharia e Participacoes, Tecnisa and KlabinSegall.

S&P is the second rating agency that downgrades the sector this year -- the first was Fitch, which on Jan. 21-22 reduced the ratings of six companies in the sector (
click here for link on the report we did at the time.) Check this posting too, we wrote it a few days after the Fitch downgrade -- in it, LatinFinance, the magazine and specialised newsletter, warns of the dangers the sector braces for amid the weakest Brazilian economy in decades.


The fourth quarter was the end of the world for some of these companies; Cyrela saw the value of projects tumble by 66 percent.
Leverage, therefore, will likely remain a factor of pressure for the industry in 2009 -- as prospect sales value falls, the weight of debt on cash usage turns bigger. Total debt excluding Housing Financial System (SFH) loans compared to the industry's Ebitda (a measure of debt-servicing capacity) was 3 times debt in September, compared with 2 in June 2008. It probably rose during the fourth quarter to somewhere close to 3.5 times. The increased use of cash to cover ''construction, advertising and operational costs´´ will affect the indicator even more. Liquidity position measured by cash to short term debt dropped to an average of 2 by December 2008, versus 3.4 in June.

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