Cyrela’s Ba2/Aa3.br ratings are supported by its solid position in the Brazilian homebuilding market, with a strong brand name, good diversification in terms of product offerings and experienced management team. Additional credit positives include the company’s still-adequate operating performance even in adverse market conditions, good liquidity and low leverage.
At the same time, a slow and gradual recovery in Brazil’s homebuilding industry will likely translate into more soft revenue and lower new housing start growth rates, and reduced business opportunities, which will keep Cyrela’s operating performance below pre-recession levels at least until year-end 2018. Another credit concern is Cyrela’s long-term receivables from finished units, which expose the company to client delinquency risk.
Cyrela’s operating performance deteriorated during the downturn in Brazil’s homebuilding industry, but remained generally strong. The company’s revenues declined to BRL2.7 billion in 2017, 54% less than that in 2014, but adjusted gross margins remained stable at 30%-36%. While we expect revenues to remain at around BRL3.0 billion in 2018, with recovery only likely from 2019 onward, free cash flow should continue high at around BRL400-500 million in 2018 on the fast pace of inventory monetization and lower new housing starts.
As well, Cyrela’s leverage ratio will continue to decline as the company amortizes at least a portion of its upcoming debt maturities and remains prudent in managing creditor and shareholder returns to preserve its creditworthiness. The company’s leverage ratio declined to 29.6% at the end of 2017 from 34.3% a year earlier due to lower funding requirements for new projects and to Cyrela’s strategy to adequate its capital structure to the lower sales environment in Brazil.
Cyrela’s liquidity profile is also good, with BRL1.1 billion in cash and equivalents at the end of March 2018, sufficient to cover total reported short-term debt maturities by 0.9x. Furthermore, Cyrela has around BRL1.4 billion in receivables from finished units that should become available with the effective transfer of mortgages to lending banks and ample availability of committed project loans under the SFH program. The proposed debentures will enhance the company’s financial flexibility further and allow it to use cash in excess to amortize upcoming debt maturities, thus lengthening its debt maturity schedule. Pro forma for the transaction, we expect Cyrela’s cash coverage of short term debt to increase to 1.3x.
The proposed senior unsecured debentures will be effectively subordinated to Cyrela’s existing secured debt. Despite the effective subordination they are rated at the same level as Cyrela’s CFR given the high amount of unencumbered assets that covered unsecured debt by 4.3x at the end of 2017 based on our estimates and that in case of a default should provide good recovery for the unsecured instruments. At the end of 2017, approximately 60% of Cyrela’s outstanding debt was secured, mainly related to SFH loans that are secured by specific real estate assets.
The stable outlook reflects our expectation that the deterioration in the company’s operating performance and in Brazil’s homebuilding industry has bottomed out, and both the company’s performance and the industry will recover slowly and gradually in the next 12-18 months.
A rating upgrade would depend on an upgrade of Brazil’s (Ba2 stable) sovereign rating. A rating upgrade would also require the total debt to-capitalization ratio to remain consistently below 40% (29.6% in 2017) and EBIT interest coverage to increase above 4.5x (0.9x in 2017).
A downgrade could be triggered if there is a material deterioration in Cyrela’s cash availability to cover short-term debt (0.9x in March 2018), or if the total debt-to-capitalization ratio increases to above 50% for an extended period. A meaningful increase in the proportion of secured debt or a decrease in the amount of unencumbered assets that could be used to pay down unsecured debt could also result in a downgrade of Cyrela’s unsecured ratings. A downgrade of Brazil’s sovereign rating would also trigger a downgrade of Cyrela’s ratings.
Founded in 1962 and headquartered in São Paulo, Brazil, Cyrela has a history of over 50 years in the homebuilding market and is one of the largest fully integrated homebuilders in the country, with operations in the low, middle and high income housing segments. In 2017, Cyrela reported net revenue of BRL2.7 billion ($837 million) and net losses of BRL95 million ($29 million), mainly related to non-cash provisions.
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