OREANDA-NEWS. Fitch Ratings has upgraded the Long-Term Foreign Currency Issuer Default Ratings (IDR) on Brookfield Incorporacoes S.A. (BISA) to 'B+' from 'B' and National Long-Term Rating to 'A-(bra)' from 'BBB+(bra)'. The Rating Outlook for the corporate ratings is Stable.
A full list of the rating actions follows at the end of this press release.

KEY RATING DRIVERS

BISA's upgrade reflects the strengthening of the high and frequently tested financial support from its controlling shareholder, Brookfield Asset Management Inc. (BAM), and its integration with the parent. Financial support from the parent has been provided on a constant basis and was evidenced by the BRL3.0 billion cash injected in BISA through capital increases and parent loans during 2014 and Feb. 2016. In 2014, the controlling group had already acquired the company's shares in circulation in the market, which increased the participation of the controlling group to 98.7% of BISA's total capital. Additionally, the company received BRL396 million of capital support between 2012 and 2013.

BISA's capitalization measures adopted by the parent have been fundamental to reducing the company's high refinancing risk and finance its working capital needs. The company's corporate debt fell to BRL772 million in December 2015 from BRL2.7 billion at end-2013. On a stand-alone basis, BISA continues to report a continued and sharp weakening of its credit metrics. The metrics remain materially pressured by negative operating cash flow generation, and are affected by significant project delays, relevant amounts of cost adjustments and high sales cancellations.

The ratings take into consideration that new measures for the strengthening of the company's capital structure and liquidity will be necessary and that BAM will continue to provide unrestricted financial support to BISA. Fitch incorporated in its analysis the 'Corporate Rating Methodology - Including Short-Term Ratings and Link Between Holding Parents and Subsidiaries' of Aug. 17, 2015. On an individual basis, without the strong evidences of support and integration of the company's businesses with the parent, BISA's rating would be lower in multiple notches.

Important Group Support Reduces Refinancing Risk

Fitch believes that the corporate debt will continue to be amortized with parent funds. The participation of the corporate debt in BISA's total debt reduced to 29% in Sept. 2015 from 61% at end 2013.

As of Sept. 30, 2015, the company reported a total debt of BRL2.7 billion, with BRL1.1 billion maturing in the short term, of which BRL783 million consisted of corporate debt, and BRL424 million was short term. On a pro forma basis, Fitch estimates that the company has BRL580 million of corporate debt as of March 22, 2016, of which BRL376 million matures up to December 2016, BRL165 million in 2017 and BRL39 million in 2018 and 2019.

Operating Performance Remains Weak

BISA's operating results remain very weak. The company has adopted a series of measures to recover its operational efficiency, and the controlling shareholder support will be fundamental to BISA's strategy of resuming project launches in 2016. However, low margin projects are still under development and should continue pressuring the company's results at least over the next couple of years. Brazil's weak macroeconomic environment becomes more challenging the recovery of company's operating results.

BISA has as its main challenges to significantly reduce the high volume of sales cancellations, manage the expected increase of inventory of finished units and terminate the projects under development. During the first nine months of 2015, the company recorded sales cancellations of BRL1.0 billion, against BRL807 million in 2014, which resulted in negative net pre sales of BRL123 million during the above period. The high inventory of concluded units represented 24% of the total inventory of BRL2.9 billion in Sept. 2015, and compares with 17% at end 2014. The project deliveries scheduled for 2016 amount to a relevant potential sales value (PSV) of around BRL2.8 billion, of which 33% consisted of units in inventory. The expected volume of project deliveries in 2016, in a scenario of economic and income deterioration, and higher credit restrictions, may additionally pressure sales cancellations and increase the company's inventories.

Operating Cash Flow Should Remain Negative in 2016.

During the LTM period ended September 2015, BISA reported negative adjusted EBITDA of BRL422 million, negative funds from operations (FFO) of BRL443 million and negative cash flow from operations (CFFO) of BRL253 million. The negative operating cash generation resulted from negative operating margins, due to the recognition of additional project costs, of BRL546 million, as well as BRL186 million of revenue reversal due to high cancellation of contracts, and high financial expense with its debt. Fitch projects negative CFFO in 2016, due to high working capital needs for the support of projects under development, as well as to resume the new project launches. Fitch estimates a PSV of around BRL1.8 billion in 2016.

High Leverage

BISA's leverage ratio should continue not measurable, since EBITDA and CFFO is expected to remain negative Under a potential cash flow perspective, the ratio total receivables on balance sheet plus total inventory, added to the revenue to be recognized over net debt, plus obligations with real estate acquisition for development and plus cost to incur from units sold was of 1.8x in September 2014, compared to 1.7x at end-2014. This ratio remains weak and below the sector average.

Key Assumptions

Fitch's key assumptions, in accordance with the base case scenario for this issuer include:
--Continued strong support integration with the controlling shareholder;
--Reduction of corporate debt based on the parent support;
--Negative EBITDA in 2016 and 2017;
--Resume project launches in 2016, with a PSV estimated by Fitch of around BRL1.8 billion;
--Still high volume of sales cancellations in 2016.

RATING SENSITIVITIES

Future developments which could, individually or collectively lead to a negative rating action are:

--A weakening of BAM's credit profile.

LIQUIDITY

The providing of funds from its controller has allowed BISA to amortize its corporate debt and fund the working capital needs of the projects in development. As of September 30, 2015, the company reported cash and marketable securities of BRL337 million, for a short term debt of BRL1.1 billion, of which BRL783 million consisted of corporate debt. From Sept. 2014 until the present date, the company made various repayments of corporate debt. On a pro forma basis, Fitch estimates that BISA has BRL580 million of corporate debt, of which BRL376 million due up to the end of 2016, BRL167 million due in 2017 and BRL39 million in 2018 and 2019.

Fitch has upgraded the following BISA's ratings:

--Long-Term Foreign and Local Currency IDRs to 'B+' from 'B';
--National Long-Term Rating to 'A-(bra)' from 'BBB+(bra)';
--Rating of the fourth debenture issuance in the amount of BRL300 million, final maturity in August 2016 to 'A-(bra)' from 'BBB+(bra)'.

The Rating Outlook for the corporate ratings is Stable.