OREANDA-NEWS. Fitch Ratings has affirmed Servicios Corporativos Javer, S.A.P.I. de C.V.'s (Javer) ratings as follows:

--Foreign currency Issuer Default Rating (IDR) at 'B';
--Local currency IDR at 'B';
--USD320.25 million senior unsecured notes due 2021 at 'B+/RR3'.

The Rating Outlook is Stable.

Javer's 'B' ratings reflect its consistent business strategy that is oriented to the affiliated low-income segment, with Infonavit as its main mortgage provider. This strategy has allowed Javer to maintain a stable cash conversion cycle, translating into positive free cash flow (FCF). The company funding strategy of relying primarily upon long-term public debt with almost no secured debt is also unique for the industry and has led to an 'RR3' rating of its public bonds. Further considered in the company's ratings are its solid cash position, focus on FCF generation and manageable debt amortization schedule. In Fitch's view, Javer's ratings are constrained by its geographic concentration, as well as limited financial flexibility characterized by high leverage and low interest coverage.

KEY RATING DRIVERS

Weak Credit Profile due to High Leverage:
Javer's current adjusted gross leverage ratio is weak for the rating category. Fitch calculates adjusted leverage considering the nominal amount of outstanding debt balance instead of the value reported on the balance sheet according to IFRS. Fitch estimates that Javer's adjusted gross leverage will be around 4.0x-4.5x and net leverage will be around 3.0x-3.5x during 2015-2016 due to an increase in EBITDA generation, as a result of stability in its major markets and deployment of new projects in Estado de Mexico and Cancun, coupled with stable debt levels; deviations from these expectations could result in negative rating actions. According to Fitch's calculations, Javer's gross leverage was 5.3x as of Dec. 31, 2014, similar to the one registered the prior year of 5.4x, and within expectations previously incorporated in the ratings.

Total adjusted debt increased to MXN4.767 billion at the end of 2014 from MXN4.270 billion at the end of 2013, mostly due to the Mexican peso depreciation in 2014 (12.55% year over year), Javer's USD320.25 million senior unsecured notes when translated to Mexican pesos resulted in a MXN525 million foreign exchange loss. The rating affirmation incorporates Javer's capacity to maintain focus on its FCF generation, improvement in its cash position coupled with its extended debt maturity profile.

Focus on FCF Expected to Continue in 2015:
Javer's MXN66 million positive FCF was lower than last year's MXN315 million, even though 2014's funds from operations (FFO) were MXN103 million higher than the MXN177.6 million reported in 2013. This was the result of the strategy to acquire housing projects and land with permits and infrastructure already in place therefrom other homebuilders currently in Concurso Mercantil (restructuring process). This investment in working capital represented around MXN1.055 billion. FCF calculation considers cash flow from operations less interests paid, less capital expenditures. Fitch expects that the company's FCF to continue positive in 2015 and 2016, as the land investments return to normalized levels of MXN500 million.

Ability to Adjust Business Model:
Positively factored into Javer's ratings is the company's ability to adjust its business strategy during 2014 to take advantage of the space left in the industry by the three Mexican homebuilders that filed for Concurso Mercantil. This situation allowed Javer to sell 18,525 units during 2014, a 6.5% increase compared to units sold in 2013. The increase during 2014 in terms of total income represented 11.7% when compared to 2013, reaching MXN6.057 billion. During 2014, the company continued to balance its low-income and middle-income and residential housing production. The latter segment, which carries better margins, represented 52.1% of total units sold in the year (or 9,660 units), similar to the 50.7% registered in 2013.

Stable Margins and Low Interest Coverage:
Javer's Fitch Calculated EBITDA for 2014 was MXN898 million, a 13% increase when compared to MXN795 million in 2013. The company's interest coverage levels are low with ratios around 1.5x. According to Fitch's calculations FFO interest coverage ratio was 1.5x at the end of 2014 and 1.3x at the end of 2013. Fitch's expectation is that this ratio will improve slightly at levels around 1.8x in 2015 due to higher FFO generation and stable FX rate. EBITDA/gross interest expense ratio was 1.6x at the end of 2014 and 2013. Javer's EBITDA margins have remained stable during the last three years reaching 14.8%, 14.7% and 14.3% during 2014, 2013 and 2012, respectively; however, these levels are lower than the average of 21.2% during 2008-2011. This margin compression reflects the decision to avoid speculative land reserve acquisitions that usually allowed the company to have higher gross margins, as well as a competitive business environment. The ratings incorporate the expectation that the company's EBITDA margin will remain at around 14.5% during 2015, as a result of Javer's strategy towards increased production of affordable entry level housing, which traditionally carries lower margins.

Refinance Need in Mid-term:
Javer has a manageable debt amortization schedule with no material debt maturities during the upcoming years. Javer's cash position as of Dec. 31, 2014 was MXN1.308 billion. This level of cash was practically the same as of year ended in 2013. The company does not maintain any factoring of its account receivables embedded in its cash position. Javer's debt of MXN4.8 billion consists primarily of its USD320.25 million (MXN4.7 billion) senior unsecured notes due in 2021. Javer's remaining debt balance is comprised of capital leases. Debt payments due in 2015 are approximately MXN26 million.

Limited Geographic Diversification:
Javer's limited geographic diversification constrains its ratings; around 81% in 2014 and 83% in 2013 of Javer's total revenues were generated in the states of Nuevo Leon and Jalisco. This concentration increases the company's dependence upon specific local and municipal governments to secure land and permits, and translates into exposure to individual market dynamics. The company accounts for 18.8% of mortgages granted by Infonavit in Nuevo Leon and 12.3% in Jalisco. Although this concentration is somehow mitigated through the company's long-term strategy to overweight the affiliated affordable entry level segment with Infonavit as its main mortgage provider, because this segment usually presents more demand and government support programs in the form of subsidies. This strategy has allowed Javer to have a shorter working capital cycle.

Stable Business Position, Adequate Land Reserves:
Javer consolidated itself as the largest supplier of Infonavit homes in the country at year-end 2014; the company is also the largest supplier of homes titled through Infonavit in the state of Nuevo Leo, Jalisco and Queretaro. Javer had land reserves equivalent to 106,131 homes as of Dec. 31, 2014, which represents about six years of production. Sixty nine percent of Javer's land reserves are inside the urban perimeters established by the new Urban Development and Housing Policy and the rest are land reserves with infrastructure and/or housing already in them that are authorized to operate as housing developments. The breakdown of these reserves between owned and held through land trust agreements is approximately 63%/37%. Javer's strategy is to invest approximately MXN500 million per year in land reserves replacement.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Housing prices increases at or below estimated inflation.
--Low-double digit revenues growth in 2015-2016 then stable at 2016 levels.
--Improvement in adjusted gross leverage towards 4.5x in 2015 reflecting increased EBITDA generation through deployment of new projects in Estado de Mexico and Cancun and a stable debt levels.

--Positive FCF in the range of MXN12 million-MXN77 million per year over the next two years.

RATING SENSITIVITIES

A negative rating action could be triggered by a deterioration in the company's credit protection measures and cash position due to weak operational results and/or Capex levels substantially above expectations, deterioration in FCF generation driven by increasing working capital needs, and continued decline in EBITDA margins. Total debt to EBITDA consistently above 5.0x will pressure Javer ratings.

Conversely, a positive rating action could be triggered by a combination of the following factors: material improvement in FCF generation resulting in consistent generation of positive FCF, stable operational performance, and significant strengthening in the company's leverage and interest coverage metrics.