Fitch Downgrades Cyrela Commercial Properties' IDR to 'B+'; Outlook Negative

RIO DE JANEIRO--(BUSINESS WIRE)-- Fitch Ratings has downgraded Cyrela Commercial Properties S.A. Empreendimentos e Participacoes' (CCP) foreign currency and local currency Issuer Default Ratings (IDR) to 'B+' from 'BB'. At the same time, Fitch has downgraded CCP's national scale long-term rating to 'A-(bra)' from 'AA-(bra)'. The Rating Outlook for the corporate ratings is Negative. A full list of rating actions follows at the end of this release.

The rating downgrades reflect CCP's weaker cash flow generation, pressured by highly unfavorable macroeconomic conditions and increased operational cash burn, due to higher financial expenses. Net leverage is high and should remain above 7.0x at least in the next two years. The company's liquidity is satisfactory, but Fitch expects higher cash burn in 2016 and 2017. Interest coverage ratios are weak and significantly reduced since 2013 with no expectations of improvement while the negative economic conditions persist. Fitch forecasts Brazilian GDP will fall 3.5% in 2016 and inflation and interest rates will remain high.

The capital increase of BRL400 million and the sale of two properties in 2015 was positive, but not sufficient to reduce the company's indebtedness. CCP is close to the end of its heavy investment cycle and, despite the reduction in investments expected for the next couple of years, free cash flow (FCF) should remain negative pressured by weak operational cash generation and the company's financing requirements. Fitch does not expect CCP's credit metrics to improve in the short term, absent a relevant asset sale and/or capital increase.

The Negative Outlook reflects CCP's important challenges to improve its credit metrics to more conservative levels, in a less favorable macroeconomic conditions. Fitch expects higher vacancy rates and lower lease spreads in rental contracts in the next couple of years, pressuring even more the company's cash flow generation and offsetting the benefits from revenues of projects delivered. High volume of lease contracts expiring or with market alignment expected in the short term also presents challenges to CCP. Fitch views that additional measures to reduce CCP's indebtedness and leverage are necessary and will be key to prevent new negative rating actions.

KEY RATING DRIVERS

Cash Flow to Remain Pressured

CCP's cash flow generation will continue to be affected by negative business conditions. Fitch expects a scenario with high vacancy rates and low lease spreads once demand for commercial properties is directly related to Brazil's macroeconomic conditions. Additional pressure is expected in CCP's lease agreements, as a high 46% of the contracts (by revenues) have market alignment scheduled for 2016 and 2017, while 19% of the office and warehouse contracts and 48% of shopping contracts will expire in the period.

In 2015, the company generated BRL292 million of adjusted EBITDA, including BRL54 million from dividends received, and Fitch projects adjusted EBITDA around BRL215 million in 2016. Fitch base case scenario considers vacancy rates between 15% and 20% for office and warehouse segments and leasing spreads below inflation rate. Fitch excludes gain/loss from the sale of assets from EBITDA calculation.

High interest expenses should continue to pressure CCP's cash flow generation capacity. In 2015, the company's cash flow from operations (CFFO) totaled only BRL23 million and FCF was negative BRL475 million, as a result of investments of BRL475 million and dividends of BRL23 million during the year. Fitch expects FCF to remain negative in 2016 and 2017, as investments should amount about BRL250 million during the period.

Interest coverage deteriorated and is not expected to recover in the short term. In 2015, EBITDA/interest and FFO interest coverage ratios reduced to 1.0 and 0.9x, respectively. These numbers negatively compare with 1.3x and 2.4x, respectively, reported in 2014, and 3.3x and 4.2x in 2013. Fitch expects interest coverage close to 0.7x during 2016.

High Leverage Not Sustainable in Medium Term

Fitch projects CCP's net leverage to remain above 7.0x in 2016 and 2017. Notwithstanding the equity injection and sale of assets, net debt remained stable at BRL1.9 billion in 2015 and is not expected to reduce in the short term, as FCF should remain negative. Leverage remains high as a result of relevant investments since 2012. CCP reported net debt/adjusted EBITDA ratio (including dividends received) of 6.6x in 2015 and compares with the peak of 8.6x in 2014. FFO adjusted net leverage increased to 7.7x in 2015, from 4.6x in 2014. Relative to the value of the company's property portfolio, loan-to-value ratio was 57% and 44% on a net basis, at December 2015.

Vacancy Rate Remains a Concern

Vacancy should remain high, pressured by difficult business environment. As of Dec. 31, 2015, financial vacancy rate was 10.7% and physical vacancy was 8.3%, compared to 14.4% and 11.3%, respectively, in 2014. Higher stock in the market also contributed to lower leasing spread. In 2015, average rent for office buildings reduced about 13%, while the average rent for warehouse segment remained relatively stable.

Diversified Portfolio Adds Flexibility

CCP is one of the largest companies of investment, lease and commercialization of commercial properties in Brazil, with a diversified and high quality portfolio. The diversification of revenues from shopping centers, office buildings, industrial warehouses and services adds more flexibility to the company. In the last few years, shopping centers gained relevance to the company's portfolio and represented about 39% of CCP's recurring revenues, followed by office buildings (29%), services including parking lot (20%) and industrial warehouses (8%).

At end 2015, the company owned 28 commercial properties in operation, with an estimated market value of BRL4.4 billion. CCP has a concentration of tenants and the 10 largest represented 51% of its revenues in 2015. The company has maintained low delinquency rates, even under diverse macroeconomic conditions.

KEY ASSUMPTIONS

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

--Vacancy rates between 15% and 20% for office and warehouse and 10% for shopping in 2016;

--Reduction in average rent of 5% to 7% in 2016;

--Sale of assets of BRL236 million in 2016;

--Net leverage above 7.0x in 2016 and 2017;

--Investments of BRL250 million in 2016 and 2017.

RATING SENSITIVITIES

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

--Net leverage consistently above 7.0x, without the expectation of a reduction trend in the following years;

--EBITDA to gross interest expense coverage ratio consistently below 0.7x;

--Liquidity falling to levels that considerably weaken short-term debt coverage;

--Sale of assets that results in a weaker portfolio of properties, with a significant reduction of the company's cash flow generation capacity.

Future developments that may individually or collectively lead to a revision of the Rating Outlook or positive rating action include:

--Significant improvement in the company's cash flow generation, following the end of its investment cycle;

--Additional proactive steps by the company to materially bolster its capital structure in the absence of high operating cash flow.

LIQUIDITY

CCP's liquidity is satisfactory for debt maturities due in the short term. As of Dec. 31, 2015, cash and marketable securities totaled BRL566 million and total debt, BRL2.5 billion. CCP's cash position benefited from the BRL400 million capital increase in 2015. The company has BRL413 million of debt maturing in the short term and BRL408 million in 2017, of which BRL205 million and BRL258 million, respectively, consisted of corporate debt. In February 2016, CCP amortized BRL100 million of debentures. CCP has a standby credit facility of BRL150 million that is expected to be utilized to refinance debt maturities.

CCP has an adequate financial flexibility from its unencumbered assets. As of Dec. 31, 2015, available unencumbered assets had an estimated market value of BRL1.3 billion, which may be available for sale or serve as collateral for a secured financing, if needed. The estimated value of unencumbered assets covered about 1.5x of corporate debt of BRL885 million (0.6x in December 2014). This improvement was due to the delivery of Shopping Cidade Sao Paulo in 2015.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings for CCP:

--Long-term Foreign Currency IDR to 'B+' from 'BB';

--Long-term Local Currency IDR to 'B+' from 'BB';

--Long-term National Scale rating to 'A-(bra)' from 'AA-(bra)';

--Second debenture issuance, in the amount of BRL204.4 million, due in 2017, to 'A-(bra)' from 'AA-(bra)';

--Third debenture issuance, in the amount of BRL150 million, due in 2018, to 'A-(bra)' from 'AA-(bra)';

--Fifth debenture issuance, in the amount of BRL200 million, due in 2019, to 'A-(bra)' from 'AA-(bra)'.

The Outlook for the corporate ratings is Negative.

Summary of Financial Statement Adjustments

--Net revenues and Costs: Fitch has adjusted net revenues and costs by excluding the impact from asset sales.

Additional information is available at www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002093

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002093

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160406006522/en/

Fitch Ratings
Primary Analyst
Fernanda Rezende, +55-21-4503-2619
Director
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP: 20010-010
or
Secondary Analyst
Jose Roberto Romero, +55-11-4504-2603
Director
or
Committee Chairperson
Ricardo Carvalho, +55-21-4503-2627
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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