OREANDA-NEWS. Fitch Ratings has affirmed the long-term Foreign Currency Issuer Default Ratings (IDRs) of Brookfield Incorporacoes S.A. (Brookfield Incorporacoes) at 'B' and its long-term National Rating, at 'BBB+(bra)'. The Rating Outlook for the corporate ratings has been revised to Negative from Stable.

A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

The affirmation of Brookfield Incorporacoes' ratings reflects the strong integration with the controlling shareholder, Brookfield Asset Management Inc. (BAM, IDR 'BBB-'), besides the support provided by the parent. The group's financial support has been continued and was made evident by the capital increases of BRL1.260 million in 2014 and in the first quarter of 2015, by the BRL200 million of intercompany loans from a subsidiary of the Brookfield group, besides the acquisition of shares in circulation in the market, which increased the participation of the controlling group to around 97% of the total capital. Between 2012 and 2013, the company received BRL396 million in capital injections. Fitch believes that new measures aimed at enhancing the company's capital structure and liquidity will be implemented still in 2015, through capital increases or inter-company loans, and this expectation was incorporated to the ratings. On a stand alone basis, without the strong evidences of support and the integration of company's business with its controlling group, Brookfield Incorporacoes' ratings would be several grades lower.

BAM's support has been fundamental to reduce the high pressures on corporate debt refinancing and to strengthen Brookfield Incorporacoes liquidity. The company has been successful in amortizing and lengthening its corporate debt maturity profile and has considerably reduced its corporate debt volume falling due in 2015. However, Brookfield Incorporacoes shows a continued and sharp weakening of its credit ratios, which are strongly pressured by relevant amounts of cost adjustments, negative EBITDA generation and high sales cancellations.

The Negative Outlook reflects the major challenges related to the need of strengthening of credit indicators and operating performance of Brookfield Incorporacoes. The risk of an increased volume of sales cancellations, reduction in the capacity to resale the units which had their sales contracts cancelled and an increase in the inventory of finished units are of concern for Fitch, since the company's credit ratios should be further pressured by the strong volume of project deliveries scheduled for 2015 within a less favorable macroeconomic environment. These factors can increase the need for working capital to support the projects under development and negatively affect company's operating cash generation capacity, which could result in rating downgrades.

Important Group Support Reduces Refinancing Pressure

Brookfield's capitalization measures taken by the controlling group for Brookfield Incorporacoes capitalization were fundamental to reduce the high refinancing risk and strengthen company's liquidity. As of Sept. 30, 2014, the company reported cash and marketable securities of BRL620 million, for a total debt of BRL3.9 billion, of which, BRL1.4 billion consisted of corporate debt maturing up to end 2015.

Brookfield Incorporacoes has been successful in amortizing and lengthening its corporate debt maturity profile, with capitalization of BRL1.260 million and BRL200 million in inter-company loans from the controlling group, in 2014 and during the first quarter of 2015, combined with around BRL670 million of recent debt issuances. On a pro forma basis, Fitch estimates that the company has BRL351 million of corporate debt maturing up to December 2015 and BRL398 million in 2016, a significant reduction when compared with the BRL1.4 billion reported in September 2014. Since end 2013, company's net debt reduced by near BRL1 billion, to around BRL2.5 billion on a pro forma basis.

Weak Operating Performance

Brookfield Incorporacoes operating result remains strongly affected by costs above budget and by the still high volume of sales cancellations. During the last 12 months (LTM) ended in September 2014, the company generated negative adjusted EBITDA of BRL715 million, which reflects the impact of the recognition of additional project costs of BRL110 million and BRL442 million of revenue reversal resulting from the high volume of sales cancellations.

Brookfield Incorporacoes has as its main challenge to significantly reduce the high volume of sales cancellations and manage the increase of the inventory of concluded units. These two important factors will be more strongly tested in 2015 and 2016, years of high volume of project deliveries. During the first nine months of 2014, the company had BRL646 million in sales contracts cancelled, against BRL649 million in 2013, and the inventory of finished units accounted for 18% of the total inventory in September 2014. The high volume of project deliveries scheduled for 2015, with potential sales value (PSV) of around BRL5.3 billion, of which, near BRL991 million consisted of units in inventory, could further pressure the sales contract cancellations and increase company's inventory. Brookfield Incorporacoes's sales speed has been lower than the sector's average, and the average sales-over-supply (SoS), net of sales contract cancellations, was at 5% per quarter between January and September 2014

Brookfield Incorporacoes has adopted a series of measures to recover its operational efficiency. However, lower margin projects are still in the conclusion phase and continue to pressure results. The deterioration in local macroeconomic environment, the sector's long operating cycle and Fitch's negative outlook for the homebuilding construction sector in 2015 make the recovery of company's operating results even more challenging.

Cash Flow from Operations Should Remain Negative in 2015

During the LTM period ended September 2014, Brookfield Incorporacoes reported negative funds from operations (FFO) of BRL592 million and negative cash flow from operations (CFFO) of BRL453 million. The weak operating cash generation resulted from negative operating margins and high financial expense with its debt. Since 2009, the company has been reporting negative CFFO, resulting from a high need for working capital to sustain its activities. Fitch does not project a positive CFFO in 2015, since the company still has a high need for working capital to support the projects under development. In the agency's opinion, the increased volume of project deliveries in 2015 and 2016, the maintenance of reduced project launches, together with measures to improve the transfer process of buyer credits to banks, should contribute for a gradual recovery of company's operating cash generation as from 2016.

High Leverage

Brookfield Incorporacoes' leverage should remain high, since a recovery of EBITDA generation is not expected in the short term. Fitch expects EBITDA margin to remain negative in 2015, with a slight recovery in 2016, which should contribute to maintain leverage at a high level.

Under a potential cash flow perspective, the company also remains strongly leveraged. The ratio total receivables on balance sheet plus total inventory, added to the revenue to be recognized over net debt, plus obligations with real estate acquisition for development and plus cost to incur from units sold has also remained weak at 1.6 times in September 2014 but stable in relation to that of December 2013.

KEY ASSUMPTIONS
Fitch's key assumptions, in accordance with the base case scenario for this issuer include:
--Continued support and integration with the controlling shareholder;
--Maintenance of the volume of sales cancellations at the 2014 level;
--Negative EBITDA in 2015;
--Negative operating cash generation in 2015, with gradual recovery in 2016.

RATING SENSITIVITIES

Future developments which could, individually or collectively lead to a negative rating action are:
--Any evidence of reduction of support and integration with the controlling parent;
--Short-term corporate debt coverage by the cash and marketable securities lower than 1.0 time;
--Strong increase in sales cancellations, which contributes to increase the inventory of finished units, above 25% of the total inventory.

Positive rating actions are not expected in the short term.

Fitch has affirmed Brookfield Incorporacoes' ratings as follows:

--Long-Term Foreign and Local Currency IDRs at 'B';
--Long-Term National Rating at 'BBB+(bra)';
--Second debenture issuance, in the amount of BRL366 million, final maturity in 2016, at 'BBB+(bra)';
--Third debenture issuance, in the amount of BRL300 million, final maturity in 2016, at 'BBB+(bra)';
--Fourth debenture issuance, first series, in the amount of BRL76.76 million maturing 2015, at 'BBB+(bra);
--Fourth debenture issuance, second series, in the amount of BRL223.24 million maturing 2016, at 'BBB+(bra).

The Outlook for the corporate ratings is revised to Negative from Stable.