Fitch Downgrades Cyrela's IDR to 'BB-'; Outlook Stable

RIO DE JANEIRO--(BUSINESS WIRE)-- Fitch Ratings has downgraded Cyrela Brazil Realty S.A. Empreendimentos e Participacoes' (Cyrela) Foreign and Local Currency Issuer Default Ratings (IDR) to 'BB-' from 'BB'. At the same time, Fitch has downgraded the long-term national scale to 'A+(bra)' from 'AA-(bra)'. The Rating Outlook for Cyrela's corporate ratings is Stable.

The ratings downgrade reflects the significant deterioration in Cyrela's operational cash flow generation, which is materially lower than previously projected, and the important challenges to recover its operating margins and cash flow generation in 2017, in an unstable business environment. Weak sales and high sales cancellation during 2016 due to depressed macroeconomic conditions pressured the company's profitability and leverage ratios.

The Stable Outlook is supported by the expectation of a gradual recovery in Cyrela's operational cash flow during 2017. In Fitch's opinion, the expected reduction of costs from projects under construction, the significant volume of project deliveries in 2017, and lower project deliveries in the Northeast region, which has reported high sales cancellations, could benefit operational cash generation. However, the difficult macroeconomic conditions should continue to pressure housing demand, which is strongly vulnerable to an economic slowdown, high unemployment and interest rates, lower consumer confidence and restrictions in lines of credit. This environment further challenges Cyrela's objectives to recover cash flow generation and to strengthen credit metrics in the short term.

KEY RATING DRIVERS

Cash Flow Generation Disappointed

After several years of strong operating cash flow generation, Cyrela's cash flow from operations (CFFO) disappointed and was well below Fitch's expectations. Sales cancellations continued to increase and damaged Cyrela's cash flows. In the latest 12 months (LTM) ended September 2016, Cyrela generated BRL514 million of adjusted EBITDA (excluding financial expenses allocated to costs) and CFFO of only BRL11 million. These numbers compare negatively with BRL855 million and BRL990 million, respectively, in 2015. Free cash flow (FCF) was negative BRL129 million in the period, after dividends of BRL106 million and investments of BRL33 million.

The recovery of Cyrela's cash flow generation will depend on the reduction of sales cancellation and improved demand. Fitch expects Cyrela to report adjusted EBITDA around BRL415 million in 2016. As of Sept. 30, 2016, the company had receivables that will mature in the next 24 months, net of cost to be incurred, of BRL2.4 billion. Programmed project deliveries of BRL7.6 billion up to the end of 2017 may also benefit the company's cash flow.

High Finished Inventory Remains a Concern

Cyrela still has the challenge to reduce its high inventory of finished units. As of Sept. 30, 2016, total inventory had an estimated market value of BRL5.2 billion and about 31% consisted of finished units. Fitch expects finished inventory to further increase in the short term, as 55% of units under construction will be delivered by the end of 2017. The delivery of BRL994 million in finished inventory more than offset the BRL347 million sales of finished inventory in the first nine months of 2016 (considering 100% participation).

Cyrela's sales speed continued to slowdown in 2016. The ratio weakened due to low project launches and high sales cancellations. The average sales over supply ratio, net of cancellations, was 7.3% per quarter in the first nine months of 2016, compared to 10.5% per quarter in 2015 and 17.3% per quarter in 2014.

Leverage Increased

Cyrela's leverage measured by FFO adjusted net leverage was below 2.1x in the last three years, and increased to 9.2x in 2015. Fitch expects it to remain high in 2016, with a gradual improvement in 2017, but still above the historical leverage level. In the LTM ended September 2016, net debt/adjusted EBITDA ratio was 3.4x, and is expected to return to around 3x only at the end of 2017, while it was below 2x between 2012 and 2015.

As of Sept. 30, 2016, total debt was BRL3.5 billion and net debt was BRL1.9 billion, compared with net debt of BRL1.5 billion in December 2015. However, a continued weak business environment in Brazil may frustrate Fitch's expectation of cash flow generation and leverage reduction. The cash flow ratio, measured as total receivables on the balance sheet plus total inventory plus revenue to be booked over net debt plus acquisition of property for development plus cost to be incurred of units sold remained strong at 3.2x in September 2016, above the industry's average.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Cyrela include:

--Adjusted EBITDA margin between 14% and 16% in 2016 and 2017.

--Cash position to remain strong;

--Net leverage to reduce to around 3.0x by the end of 2017, returning to lower levels only in 2018.

RATING SENSITIVITIES

Future developments that may individually or collectively lead to a negative rating action include:

--Continued high sales cancellations negatively impacting cash flow generation;

--Cash-to-short-term corporate debt coverage falls to below 1.3x;

--Negative FCF on a recurring basis;

--Total receivables on the balance sheet plus total inventory plus revenue to be booked over net debt plus acquisition of property for development plus cost to be incurred of units sold ratio consistently below 2.5x.

Future developments that may individually or collectively lead to a positive rating action include:

--Return of operating margins to historical levels;

--Sales cancellations and inventory reduction to more conservative levels;

--Positive FCF on a sustainable basis;

--Net leverage to return to historical levels.

LIQUIDITY AND DEBT STRUCTURE

Cyrela's ratings remain supported by the company's conservative financial strategy. The company has historically reported strong liquidity and a well-distributed corporate debt maturity profile. Cyrela's financial flexibility is well superior compared to the majority of its peers in the industry. As of Sept. 30, 2016, cash and marketable securities was BRL1.6 billion and total debt due by the end of 2017 was BRL1.5 billion and BRL1.0 billion due in 2018. Of its debt maturities, BRL337 million due by the end of 2017 and BRL335 million due in 2018, are related to corporate debt. Cyrela has an adequate debt profile, with 66% of total debt composed of credit lines from SFH (Housing Financial System). In September 2016, Cyrela concluded the issuance of BRL150 million CRI transaction due in 2018, and in November 2016, pre-paid its sixth debentures issuance (BRL100 million). The company has no exposure to FX risk and total debt is denominated in BRLs.

Additional information is available on www.fitchratings.com

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015975

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015975

Endorsement Policy

https://www.fitchratings.com/regulatory

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Source: Fitch Ratings

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