November 30, 2017 / 8:48 PM / a year ago

Fitch Assigns First-Time IDR of 'B-' to Three Techo S.A. Entities; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, November 30 (Fitch) Fitch Ratings has assigned initial Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) of 'B-' to Techo S.A., Techo en el Urubo S.R.L. and El Pahuichi S.R.L. The Rating Outlook is Stable. These companies are organized under Bolivian laws, and each one of these companies has the same controlling shareholder, Julio Novillo Lafuente. Fitch refers to these three companies as Grupo Lafuente (GL) and analyzes them on a combined basis. The ratings factor in GL's business position, very intensive working capital requirements, high to moderate leverage, expected manageable liquidity and limited business/geographic diversification. KEY RATING DRIVERS Leading Land Developer in Bolivia: Fitch views GL's business position as strong based on its market positioning, scale, land reserves, and track-record. GL has over 22 years of experience and a footprint across the industry which has resulted in the completion of 20 residential real estate development projects, totalling over 12,000 hectares. The ratings factor in GL's market position as the largest land developer in Bolivia as measured by its combined total land size of projects developed, consisting of 20,759, 58,675, and 17,247 land lots during the first six months of 2017(1H17), 2016, and 2015, respectively. GL reported total revenues of BOL776.4 million (USD112 million) in 2016. GL's primary focus is on the residential real estate development in Santa Cruz de la Sierra, the largest city in Bolivia in terms of population. Business with High Working Capital Requirements: GL's sales of land lots are primarily oriented to the lower-income segment. The company needs to maintain high inventory levels, as each project cycle takes three to four years for the land development and commercialization. GL uses two types of sales models: (i) a fixed-term sales agreement with reservation of title, whereby customers finance their purchase through a plan of fixed monthly instalments, financed up to a five-year term (a fixed-term sales agreement), or (ii) a sales agreement with up-front payment in full. GL's operations are primarily carried out through the fixed-term sales agreement model, which represents approximately 79% of GL's total transactions per year. The land sales agreements are in USD, which partially mitigates GL's foreign exchange risk exposure. Deterioration in Customer Receivables Portfolio Negatively Incorporated: GL maintained a customer receivables portfolio of approximately BOL2.0 billion (USD280 million) as of Dec. 31, 2016. Fitch expects GL's portfolio value to average USD300 million during 2017-2018. This customer receivables portfolio has an average collection period of three years as of the end of 2016. Historically, GL's customer receivables portfolio saw an over-60-day average payment delay of 7%. Due to its aggressive business growth during 2016, GL's customer receivables portfolio over-60-day average payment delay increased to 13.7% during the first nine months of 2017. The ratings incorporate expectations for GL's over-60-day-late customer receivables portfolio to return to 10% by the end of 2017 and return to historical levels of 7% during 2018 -2019. Weak Liquidity Position and Negative Recent Cash Flow Generation: GL has historically maintained minimum levels of liquidity. The company had a cash position of BOL4 million (USD577 thousand) as of June 30, 2017, while its short-term debt was BOL119 million (USD17 million). Fitch expects GL to increase its liquidity position during 2018-2019 as a result of a combination of improved cash flow generation and incremental debt. GL's cash flow generation was negative in 2016 at BOL1.3 billion (USD182 million) as a result of a material increase in its working capital needs (for an increase in inventory levels). The increase in GL's working capital in 2016 was of BOL1.3 billion (USD187 million). Fitch expects GL to improve its cash flow generation during 2018-2019 on the back of targeting for slower business growth and limited future land acquisitions. High Gross Adjusted Leverage: GL maintains low gross financial leverage, which is expected to increase as a result of incremental debt during the next months. GL's 2016 gross adjusted leverage, measured as total debt to adjusted EBITDA, was 1.5x. GL reached a total adjusted EBITDA level of BOL401 million (USD58 million), while total debt was BOL603 million (USD86 million). GL's total debt consists entirely of unsecured loans with local banks. Fitch expects GL's gross adjusted leverage to reach 5.8x by the end of 2017 and to be in the 4x-3x range during 2018-2019. GL's annual revenues and adjusted EBITDA margins are anticipated to average BOL740 million (USD106 million) and 35%, respectively, during 2017-2019. Positively factored in the ratings is the company's residual value in available inventory, land reserves and customer receivables portfolio, which are expected to be of BOL1.3 billion (USD186 million), BOL1.4 billion (USD205 million); and BOL2 billion (USD293 million) by Dec. 31, 2017. Fitch estimates GL's total loan to value at 30% by Dec. 31, 2017. DERIVATION SUMMARY GL's ratings reflect an experienced and well-positioned land developer in the Bolivian industry with high working capital requirements, important market position in the local market and relatively smaller scale when compared to regional/global players. Fitch's portfolio of rated issuers in Latin America in the single B rating category reached the following average credit metrics during 2014-2016: (1) interest coverage 2.8x, (2) total gross leverage 5.2x, (3) FCF margin -2.7%; EBITDA margin +23.9%; and, capital intensity (capex/LTM revenues ratio) 9.6%. GL's ratings are well positioned in the 'B' rating category relative to regional peers in terms of profitability and gross leverage. GL's recent track record does not fit well in the 'B' rating category relative to regional peers in terms of liquidity and capacity to generate positive FCF, while the company maintains a weaker position in terms of scale. GL's gross adjusted leverage is expected to increase during 2017-2019 and the sustainability of its capital structure is viewed as dependent on GL's capacity to reach neutral to positive FCF and/or receive continued equity injections during 2017-2019. The Stable Outlook reflects Fitch expectations that GL will generate positive FCF and materially improve its liquidity while keeping its adjusted gross leverage at 3x-4x during 2018-2019. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth rates of approximately -15%, 8.2%, and 17%, respectively, during 2018-2019 - EBITDA margin of around 35% during 2017-2019 - Negative FCF generation in 2017 and positive in 2018-2019 - Gross adjusted leverage, measured as total debt to adjusted EBITDA, in the 3x-4x range during 2018-2019 - Interest coverage ratio around 3x during 2017-2019 - Cash position consistently above BOL100 million during 2018-2019 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Fitch could consider a positive rating action if GL generates operational and FCF margins consistently above those levels incorporated in the ratings, resulting in material liquidity improvement and lower gross adjusted financial leverage. --Adjusted gross financial leverage, measured as total debt/adjusted EBITDA, consistently below 3x. --Interest coverage consistently above 4x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Fitch could consider a negative rating action if GL continues to generate negative FCF margins in 2018, resulting in material liquidity deterioration and higher than expected gross adjusted financial leverage. --Adjusted gross financial leverage, measured as total debt/adjusted EBITDA, consistently above 5x. --Interest coverage consistently below 2x. LIQUIDITY Fitch views GL's liquidity as very sensitive to its capacity to maintain neutral to positive FCF generation during 2018-2019. GL has historically maintained minimum levels of liquidity. Fitch expects GL to increase its liquidity position during 2018-2019 as a result of a combination of improved cash flow generation and incremental debt and we estimate GL's interest coverage ratio at around 3x during 2017-2019. Fitch expects GL's cash flow generation to trend neutral to positive during 2018-2019, as GL does not plan to increase its current levels of available inventory. As of June 30, 2017, GL maintained t4,543 lots in available inventory, which are expected to cover the company's sales levels during 2017-2020 period. FULL LIST OF RATING ACTIONS Techo S.A. (Techo) - Long-Term Foreign Currency Issuer Default Rating (IDR) 'B-' - Long-Term Local Currency IDR 'B-' Techo en el Urubo S.R.L. -Long-Term Foreign Currency Issuer Default Rating (IDR) 'B-' -Long-Term Local Currency IDR 'B-' El Pahuichi S.R.L. -Long-Term Foreign Currency Issuer Default Rating (IDR) 'B-' -Long-Term Local Currency IDR 'B-' The Rating Outlook is Stable. Contact: Primary Analyst Jose Vertiz Director +1-212-908-0641 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Tatiana Sclabos Analyst +56 2 24993322 Committee Chairperson Joseph Bormann, CFA Managing Director +1-312-368-3349 Date of Relevant Rating Committee: Oct. 30, 2017. Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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