Fitch Affirms BRMalls' IDRs at 'BB+'; Nat'l Scale at 'AA(bra)'; Outlook Remains Positive
OREANDA-NEWS. Fitch Ratings has affirmed the ratings of BR MALLS Participacoes S.A. (BRMalls) as follows:
--Foreign currency Issuer Default Rating (IDR) at 'BB+';
--Local currency IDR at 'BB+';
--Long-term national scale rating at 'AA(bra)';
--BRL400 million local debentures, first and second tranches due in 2017 and 2019, at 'AA (bra)';
--BRL400 million local debentures due in 2016 at 'AA (bra)';
--BRL270 million local debentures due in 2016 at 'AA(bra)'.
Fitch has also affirmed the following rating of BR Malls International Finance Limited (Finco):
--USD405 million perpetual notes at 'BB+'.
The Rating Outlook remains Positive.
The Positive Outlook reflects Fitch's expectations of continued consistent operational performance during 2015-2016 despite Brazil's challenging operational environment. BRMALLS' ratings incorporate its business position as the largest Brazilian shopping center operator, stable and predictable cash flow generation, geographical and property revenue base diversification, and low working capital requirements with renters responsible for most maintenance expenses. The ratings also factor in BRMALLS' growth strategy, stable capital structure, a large pool of unencumbered assets, and successful track record in growing the business. The company's consistent use of a balance of equity and debt to fund its organic and inorganic growth during the past five years has kept leverage levels low relative to the value of its assets.
KEY RATING DRIVERS
Resilient Operational Performance Despite Brazil's Environment: The company is projected to maintain healthy occupancy rates of around 96% while net late payments should remain manageable in the 3% to 5% range. Despite some weakness in tenant sales and same-store sales, EBITDA margins are expected to remain stable at around 80%.
Modest Revenue Growth: Fitch expects BRMALLS to reach moderate annual revenue growth rates during 2015-2016 in the 4%-7% range. This view incorporates the company's current revenue trend in the context of Brazil's current macro business environment. BRMalls' net revenue grew 5.2% during the first nine months of 2015 against 2014's same period.
Moderate Leverage: The company's total debt as of Sept. 30, 2015, was BRL5.6 billion, which includes BRL2.3 billion in public debt. The company's U.S.-dollar-denominated debt - perpetual notes - represents approximately 26% of its total debt. BRMalls' net leverage has been stable at around 4.5x during the last five years. Net leverage is expected to trend below 4x in 2016-2017. No significant additional debt is anticipated during this period.
Focus on Organic Growth: The company's capital intensity ratio, measured as total capital expenditures (capex) to revenue ratio, was 89%, 53%, and 48%, respectively, in 2012, 2013 and 2014. Fitch projects this ratio to remain in the 20%-30% range during 2015-2017. The company is expected to be free cash flow (FCF) negative during 2015-2016 as it executes its capex plan. BR Malls' negative FCF during this period is anticipated to be covered primarily by proceeds generated from recent asset divestures.
Key assumptions within Fitch's rating case for BRMalls' ratings include:
--Total owned gross leasable area (GLA) of 969,000), 978,000; and 1.054 million square meters (sm) by year-end 2015, 2016 and 2017, respectively.
--Occupancy levels around 97% during 2015-2017. Annual revenue growth of 4.2%, 6.5% and 15.7%, in 2015, 2016 and 2017, respectively.
--EBITDA margin remains at historical levels around 80%.
--Capital intensity, measured as the total capex to revenue ratio, at 25%, 20% and 20% in 2015, 2016 and, 2017, respectively.
--Main developments: Shopping Estacao Cuiaba (35,235 sm owned GLA) and Catuai Shopping Cascavel (20,668 sm owned GLA) to be opened during 2017-2018.
--No acquisition activity during 2015-2017.
--Net proceeds around BRL320 million from asset divestures received in 2015.
Positive Rating Actions: BRMALLS' ratings currently have a Positive Rating Outlook. It reflects Fitch's expectations of continued consistent operational performance despite Brazil's current business environment. The combination of the following may have a positive impact on BRMalls' ratings:
--Capacity to consistently maintain EBITDA margin and occupancy around 80% and 96%, respectively during 2015-2016;
--Net leverage trending to levels at or below 4x during 2015-2016;
--Improvement in the company's debt payment schedule reflected in lower debt due during the next 24 months relative to the company's cash position;
--Interest coverage trending consistently to levels above 2.25x toward 2017 upon current capex plan execution;
--Capacity to consistently maintain unencumbered assets-to-net unsecured debt coverage consistently around 3x.
Negative Rating Actions: Fitch would consider a negative rating action if the company's financial profile deteriorates due to some combination of the following: aggressive capex, adverse macroeconomic trends leading to weaker credit metrics, significant dividend distributions, and higher vacancy rates or deteriorating lease conditions.
The following factors may also have a negative impact on BRMalls' ratings:
--Net leverage consistently trending to levels around 5x;
--Deterioration in EBITDA margin (trending to levels around 76%) and occupancy below expected levels;
--Material increase in secured debt / total debt ratio above current levels of 50%;
--Fitch's expectation of limited improvement in the company's debt payment schedule from current levels;
--Unencumbered assets-to-net unsecured debt coverage consistently below 2.5x.
Adequate Liquidity: The company is expected to maintain sound levels of liquidity considering its expected levels of available cash, stable interest coverage ratio, unencumbered asset level, and credit access. The company's interest coverage was 2x during the last 12-month period ended on Sept. 30, 2015 (LTM September 2015), and it is expected to remain stable at this level during 2015-2016.The company's debt payment schedule is manageable and it is expected to improve post-refinancing in 2016.