-- Mexico-based homebuilder Corporacion Geo’s revenues and cash flow generation rose during the first half of 2012, despite a slowdown in the industry.
-- We are affirming our ‘BB-’ global scale and ‘mxBBB+/mxA-2’ national scale ratings on the company.
-- The stable outlook reflects our expectation that Geo’s financial policy will moderate during the next 18 months and that its internal cash flow generation will be sufficient to fund its operations without incurring additional debt.
On Sept. 13, 2012, Standard & Poor’s Ratings Services affirmed its ‘BB-’ global scale and ‘mxBBB+/mxA-2’ national scale ratings on Corporacion GEO S.A.B. de C.V. (Geo). The outlook is stable.
The ratings reflect Geo’s “aggressive” financial risk profile, with high working-capital requirements and increased used of debt. The ratings also reflect the concentration of mortgage origination for the company’s homes through Instituto del Fondo Nacional de la Vivienda para los Trabajadores (Infonavit) and Fondo de la Vivienda del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (Fovissste) as well as the political risk inherent to these government-related lenders. Geo’s “fair” business risk profile reflects its position as one of the leading homebuilders in Mexico that provides it with economies of scale, its satisfactory profitability, and its broad geographic and product diversification.
We expect as main assumptions for Geo that the company will adequately manage the softening in demand as the market is becoming more mature in the affiliated segment; that its growth pace will slow down during the next years couple of years at a rate about 5%; that total debt will gradually reduce slightly improving its key credit metrics in 2012 and 2013; and that Geo will continue to access successfully to credit lines to fund its operations either as working capital loans or construction bridge loans. By the end of 2012, we expect a mid-single-digit revenue growth from the sale of about 59,000 units, due to the company’s strategy to moderate seasonality throughout the year --by minimizing a large proportion of sales in the last quarter of the year-- and its focus on increasing its penetration in existing locations rather than investing in new regions in the intermediate term. We believe that Geo will maintain EBITDA margins at about 22% thanks to its ability to slightly increase the average price of its homes (as evidenced during the first half of the year) and ongoing economies of scale. This margin compares favorably to that of its peers across Latin America of about 18%. In the first half of 2012, Geo’s unit sales pace was favorable as it was successful at complying with recent regulatory changes in the housing industry. In our opinion, Geo is well positioned to benefit from government incentives through subsidies and from mortgage availability through public institutes, which should bode well for its sales performance through the end of 2012 and in 2013. As of June 30, 2012, Geo sold 30,173 units, up 8.5% compared with the same period in 2011, out of which 22,577 units through Infonavit; it also accessed about 10,000 subsidies for its affordable segment. Nevertheless, free operating cash flow remained negative, as anticipated payments from customers built up reflecting slower collection on units not yet collected. We don’t expect further delays during the second half 2012 and, as a result, we project Geo’s cash flows to improve until the end of the year, as it normalizes its deliveries and therefore its collections. As of June 30, 2012, total adjusted debt was MXN20.7 billion, which includes MXN3.2 billion of securitizations and recourse factoring, MXN2.7 billion related to its machinery leases, and MXN104 million of pension obligations. The company prepaid most of its $250 million unsecured notes due 2014 with the proceeds from its issuance of $400 million unsecured notes due 2022. The company used the remainder of this issuance to fund working-capital requirements to complete various projects in pipeline as well as a small portion of short-term debt. For the 12 months ended June 30, 2012, total debt to EBITDA was 4.2x and funds from operations (FFO) to total debt was 12%, compared with 3.0x and 22%, respectively, for the same period of 2011. In our opinion, Geo’s focus on a more moderate revenue growth and a gradual debt reduction through improving cash flows generation should strengthen its credit metrics by the end of 2012 and in 2013. Despite the consistent historical rise in debt, we do not expect the company to incur in additional debt during the remainder of 2012 and 2013. We project the company will post flat cash flow generation for year-end. Additionally, we do not expect a sharp reduction in debt, as the company currently doesn’t have maturities until 2014, because its short-term debt is mainly comprised of bridge loans. We project total debt to EBITDA of about 3.9x and FFO to total debt of 17% for 2012, and 3.8x and 19%, respectively, for 2013.
We consider Geo’s liquidity to be “less than adequate,” as defined in our criteria, because we project that the company’s sources of liquidity will cover 0.9x of its uses in 2012 and 1.8x in 2013. As of June 30, 2012, Geo’s cash in hand was MXN2.6 billion, compared with short-term debt of MXN3.8 billion. After the company refinanced 78% of its $250 million notes due 2014, it significantly improved its maturity schedule, lowering the short-term debt portion of its total debt to 25% in second quarter from 35% a quarter before. Although this is still a large portion of its total debt, it’s mostly comprised of bridge loans, which provides further flexibility as they are tied to the collection of housing projects. Geo obtained waivers for its credit facilities, as its current unadjusted leverage ratio exceeds the established limit in its bank agreements of 2.8x net debt to EBITDA. The breach was partly related to its adoption of IFRS. However, this breach does not constitute an acceleration event. We believe the company could require additional waivers or that it will negotiate a definite new limit, as we expect it to maintain a net leverage ratio of about 3.0x during the next 18 months. Geo is currently in compliance with the financial covenants for its bonds.
For the complete recovery analysis, see our recovery report on Geo to be published later on RatingsDirect.
The stable outlook reflects our expectation that the company’s current alignment with industry requirements will allow it to sustain its sales performance in the next years. In addition, we project that a more moderate financial policy will lead to stronger credit metrics by the end of 2012 driven by an improved cash flow generation. We also expect the company to maintain sound cash reserves without incurring additional debt during the next 18 months. We could lower the ratings if Geo’s adjusted debt to EBITDA exceeds 4.0x by year end 2012 due to higher-than-expected investments or depleted liquidity. We could raise the ratings if the company generates free operating cash flow above our expectations, leading to adjusted total debt to EBITDA of less than 2.5x, which could only occur if it paid down debt significantly in the intermediate term.
Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Global Criteria For Single-Family Homebuilders, Sept. 27, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Corporacion GEO S.A.B. de C.V.
Corporate Credit Rating BB-/Stable/--
Caval - Mexican Rating Scale mxBBB+/Stable/mxA-2
Senior Unsecured BB-
Recovery Rating 4