Credit Opinion: Servicios Corporativos Javer, S.A.P.I. de C.V.
Global Credit Research - 02 Aug 2013
Monterrey, Mexico
Ratings
Category Moody's Rating
Outlook Stable
Senior Unsecured B2
Contacts
Analyst Phone
Griselda Bisono/New York City 1.212.553.1653
Philip Kibel/New York City
Nick Levidy/New York City
Key Indicators
Servicios Corporativos Javer, S.A.P.I. de C.V.
[1]2012 2011 [2]2010 [2]2009 [2]2008
Total Revenues (Ps$ mil.) 5,090 4,719 4,674 4,932 4,473
Recurring EBITDA (Ps$ mil.) 722 896 873 1,022 1,108
Recurring EBITDA % Revenue 14.2% 19.0% 18.7% 20.7% 24.8%
Total Debt/Recurring EBITDA (X) 4.31x 3.74x 2.98x 2.33x 1.99x
Recurring EBITDA/Fixed Charges (X) 1.41x 1.82x 2.04x 2.99x 3.35x
Total Assets (Ps$ mil.) 6,763 7,129 5,877 4,965 5,139
Secured Debt % Gross Assets 1.1% 1.5% 0.9% 2.2% 42.9%
Total Debt % Total Assets 46.0% 47.0% 44.3% 47.9% 42.9%
[1] For the last twelve month period ended December 31, 2012. [2] Restated for IFRS, which Javer adopted 1/1/11
Opinion
SUMMARY RATING RATIONALE
Moody's B2 senior unsecured debt rating reflects Servicios Corporativos Javer, S.A.P.I. de C.V.'s ("Javer") leading presence in Northeastern Mexico, particularly the state of Nuevo Leon, which is home to Mexico's third-largest metropolitan area, as well as the company's solid liquidity position. The company specializes in the construction and commercialization of affordable entry level housing units as well as middle income and residential housing units. These positive factors are offset by weaker sales progress in certain Northern cities due to increasing drug-related violence in the region as well as limited subsidies in Javer's target markets. Other challenges include the need to invest capital in land, licenses, permits and infrastructure, which depending on the region can be costly, as well as the risk of finding homebuyers.
Credit Strengths
The key credit strengths for Javer are:
- Over 35 years of real estate experience, with a dominant position in the state of Nuevo Leon
- Javer's debt maturity schedule post its US$ issuances has insignificant debt coming due until 2021, creating minimal liquidity risk
- Targets mainly low- and low to middle-income buyers, which are thriving demographic sectors
Credit Challenges
The key credit challenges for Javer are:
- Concentration in Northern states of Nuevo Leon and, in particular, Tamaulipas, where drug-related violence has deterred home buying
- Lack of subsidies in target markets has resulted in a shift to higher-income housing development
- Privately-owned developer, which deters transparency
- Heavy funding concentration with INFONAVIT take-out financing of low and middle-income housing, as timing of funding inflows could range from 3-6 months, which can create liquidity problems short-term
- Certain amount of speculative inventory as INFONAVIT allocates mortgages in certain regions and/or projects, however it is up to Javer to find buyers
Rating Outlook
The stable outlook reflects Javer's solid liquidity position in a tough operating environment. In addition, the stable outlook incorporates Moody's expectation that the company will successfully deleverage the balance sheet either through a tender offer or investment back into operations. Moody's also anticipates that Javer will be able to meet its sales targets in markets with challenging demand dynamics and strong competition from regional players. Finally, the stable outlook assumes that Javer's credit metrics have reached their weakest point and should remain stable or slightly improve over the medium term.
What Could Change the Rating - Up
An upgrade of the rating would be predicated upon the company maintaining EBITDA above 15%, debt to EBITDA closer to 3x and fixed charge coverage at or above 2.0x. Finally, Moody's will need more clarity with respect to the implementation of the National Housing Policy and the impact it will have on Javer's operations in order to consider an upgrade.
What Could Change the Rating - Down
A downgrade will occur should Javer encounter further challenges in reaching titling and sales targets which result in a weakening of credit metrics from current levels such that EBITDA margins fall closer to 12% and/or debt/EBITDA approaches 5x.
DETAILED RATING CONSIDERATIONS
Key factors influencing Javer's rating and outlook include:
Liquidity & Funding
Javer has a solid liquidity position. A combination of cash flow from operations and one bank line are used primarily to fund construction. The company also has a US$210 million unsecured bond due in 2021 that was refinanced in 2011 through the execution of an exchange offer in which an additional US$30 million was issued under the same terms as the new notes. Currently, over 90% of the company's debt maturities are due in 2021, a credit positive. Mortgage financing as of June 30, 2013 comes mainly from government entities and is broken down as approximately 96% Mexican Workers' Housing Fund (INFONAVIT) and 4% sofoles/banks, FOVISSSTE and co-financing products. Javer expects its mortgage financings from INFONAVIT to remain stable in the future. This includes all of the INFONAVIT products such as "apoyo INFONAVIT" and "Cofinanciamiento". Concentration with INFONAVIT is a concern because the company relies on it and other government entities to fund the take-out financing for newly built homes. This process can often take 3-6 months which could create short-term liquidity problems.
Leverage & Capital Structure
Javer's capital structure remains solid for its rating category. Javer's total debt as a percentage of gross assets as of June 30, 2013, was approximately 51.3%, while Debt/EBITDA (LTM) was 6.10x. After considering cash on hand, Net Debt/EBITDA (LTM) was 4.39x.
Market Positioning
Javer has a leading presence in Northeastern Mexico, particularly in Nuevo León with a 15% market share in loans granted by INFONAVIT in the state. Nuevo Leon is home to Mexico's third-largest metropolitan area, Monterrey (the state's capital), which is considered the business and banking center of northern Mexico and which is a large driver of job growth in the region. Sales in this state for YE 2012 were approximately 46%. However, Javer's sales have been negatively affected over the past two years in certain regions of Nuevo Leon as well as the state of Tamaulipas, both states which share a border with the U.S., where drug-related violence and thus security concerns have resulted in a decline in job growth. As of June 30, 2013, the company's land reserves is sufficient to build approximately 109,703 units, or approximately seven years worth of construction. A considerable portion of this land bank is in troubled regions such as Tamaulipas and therefore is a concern. Positively, the company has made efforts to diversify into other states, including the State of Mexico, Queretaro and Jalisco.
Sustainability of Cash Flow & Earnings
Javer's EBITDA margins declined to 12.5% at 2Q13 on a LTM basis from 18.1% at 2Q12 LTM due to lower subsidy availability in the regions where the company operates coupled with lack luster demand. The low-income housing construction industry has also become increasingly competitive, particularly as most homebuilders shift to low-margin affordable housing construction, causing profit margin pressure for Javer. In the first half of 2013 23% of units were sold with a subsidy of which 99.9% was for vertical construction. Javer's sales mix for the six months ended June 30, 2013 was approximately 36% affordable entry-level homes and 52% middle-income homes -- segments of the market where the greatest demand lies -- as well as 11% residential and 1% commercial lot sales. It is important to note that under Javer's operating model, its product mix pricing is lower than the standard market pricing, placing a majority of its sales in the low income to high-low income price range.
External Factors
Javer is a privately owned company, which in Moody's opinion deters the company's corporate governance and thus transparency. Moody's feels that management has implemented efficient controls and possesses good knowledge of the Mexican housing industry. The company does have audited annual financial statements and as of 1/1/11 reports under IFRS.
