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Fitch Affirms Caparra Hills LLC's IDR at 'B+', and Secured Debt at 'BB'; Outlook Stable
December 21, 2016 / 6:39 PM / a year ago

Fitch Affirms Caparra Hills LLC's IDR at 'B+', and Secured Debt at 'BB'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, December 21 (Fitch) Fitch Ratings has affirmed Caparra Hills LLC (Caparra Hills) Long-Term Issuer Default Rating (IDR) at 'B+' and the senior secured debt at 'BB'. Fitch has also assigned a Recovery Rating of 'RR2' to the senior secured debt. The Rating Outlook is Stable. The company's 'B+' rating reflects Caparra Hills' limited property diversification and size, as well as high leverage that is projected to peak at around 10x in 2017. Caparra Hills' notes have been notched up to 'BB' to reflect strong recovery prospects in the event of a default. The company's loan-to-value ratio, based on the last appraisal, is estimated to be around 75%. KEY RATING DRIVERS Recovering Occupancy Rates: Fitch expects occupancy to improve in FY2017 and expects rates to recover closer to historical levels by FY2018. Fitch's base case projections anticipate occupancy will reach 85% by FY2017 and 90% by FY2018. Occupancy rates deteriorated during the last few years following the departure of a major tenant, as well as the reduction in space by a second major tenant. Caparra Hills has successfully signed leases for close to 90% of space that was vacated. Concentration and Contracts Risk: Fitch expects that counterparty risk and contract maturity will continue to improve as the company replaces key tenants. As of Sept. 30, 2016, Santander Tower's occupancy rate was 73% of which about 62% was occupied by 10 major tenants (down from 85% at Sept. 30, 2014). Within 12 months, 26% of its leases are set to expire. Contract maturity is viewed as manageable, however, as Caparra has a good track record of renewals. Secured Bond Enhances Recovery Prospects: The 'BB' rating on the secured bonds positively incorporates the collateral support included in the transaction structure. The payments of the bonds are secured by a first mortgage on the company's real estate properties and the assignment of leases. The secured bonds are payable solely from payments made to the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (AFICA) by Caparra Hills. AFICA serves solely as an issuing conduit for local qualified borrowers for the purpose of issuing bonds pursuant to a trust agreement between AFICA and the trustee. The secured bonds are not guaranteed by AFICA, do not constitute a charge against the general credit of AFICA, and do not constitute an indebtedness of the Commonwealth of Puerto Rico or any of its political subdivisions. Peak in Leverage: Fitch expects Caparra Hills gross leverage to reach 10x by FY2017, then gradually improve to 8.5x and below as a result of increased revenues from new tenants and stable EBITDA margins. Gross leverage has increased the past three years due to a significant increase in vacancy rates, after the company lost a major tenant. Caparra had USD55 million of total debt as of Sept. 30, 2016, composed entirely of secured bonds and requires annual debt service of approximately USD5.3 million (interest and principal). KEY ASSUMPTIONS --Recovering occupancy rates; --Debt-to-EBITDA reaching 10x at FY2017 then declining to 8.6x and below; --Negative free cash flow (FCF) in FY2017 due to capex on tenant improvements. RATING SENSITIVITIES A downgrade could be triggered from a lack of material improvement in the company's vacancy rates and contract maturity schedule coupled with declining cash flow generation, measured as EBITDA, resulting in weaker credit metrics. A positive rating action could be triggered by lower business risks in terms of contract maturity schedule; concentration risk while improving cash flow generation resulting in lower gross leverage of about 6.5x. A loan-to-value (LTV) of 60%, or below, would also be viewed positively. LIQUIDITY Adequate Liquidity: Caparra Hills's liquidity position is supported by its positive cash flow from operations (CFFO) and strong cash position. As of Sept. 30, 2016, Caparra Hills had USD6.1 million of cash while its short-term debt obligation was USD1.5 million. Additionally, the company maintains a debt service reserve fund of approximately USD8.7 million, covering 18 months of debt service, and an unsecured committed line of credit for USD1 million. FCF is expected to turn negative during FY2017, as the company goes through a period of tenant renovations, but will return to positive levels during FY2018, driven by increased revenues from new tenants and lower capex requirements. FULL LIST OF RATING ACTIONS Fitch has taken the following rating actions: Caparra Hills LLC --Long-Term IDR affirmed at 'B+'; --Senior secured debt affirmed at 'BB'; --Recovery Rating of 'RR2' assigned to senior secured debt. Contact: Primary Analyst Johnny da Silva Director +1-212-612-0367 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Jose Vertiz Director +1-212-908-0641 Committee Chairperson Joe Bormann, CFA Managing Director +1-312-368-3349 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Date of Relevant Rating Committee: Dec. 20, 2016. Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016883 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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