Fitch Upgrades Aliansce's Secured Debentures to 'AA(bra)'
The structure of the private secured non-convertible debentures includes a 10-year tenor and collateral support consisting of a fiduciary lien on 25% of the Shopping Grande Rio property. The loan-to-value ratio for secured debentures is estimated at around 50% during the life of the debenture.
The rating upgrade is a result of Aliansce's improved capital structure and consistent business and financial strategy execution during the last 24 months ended in March 2015, with a focus to reduce leverage, limit inorganic growth, and avoid the FX risk in Brazil's current macro scenario. The company's consistent use of a balance of equity and debt to fund its business growth during the past five years has kept leverage levels low relative to the value of its assets.
RATING DRIVERS:
Market Position and Concentration Risk Incorporated
The rating reflects Aliansce's solid business position as one of the largest Brazilian shopping center operators with stable and predictable cash flow generation. Also incorporated in the ratings is the company's property revenue-base diversification and low working capital requirements with renters responsible for most maintenance expenses. Aliansce is among the top-five shopping mall operators in Brazil and manages a total gross leasable area (GLA) of 675 thousand square meters (sqm) and owns 440 thousand sqm of GLA as of March 31, 2015. Aliansce has some concentration risk, as its top five malls represent approximately 50% of its total net operating income (NOI).
Operational Performance in Line with Industry Standards
Aliansce has maintained high occupancy levels and low default rates, which averaged around 97.5% and 2.5%, respectively, during the last five years. Same store sales (SSS) have continued relatively stable during 2014-2015, growing by approximately 8% compared with 2012-2013. Same store rent (SSR) has slowed during 2014-2015, but remains adequate at around 8%. The company is projected to maintain healthy occupancy rates of around 97%, while late payments are expected to remain at manageable levels of around 3%. Its lease portfolio has adequate lease expiration dates - in line with the industry average in Brazil, with approximately 25% of the company's lease portfolio having expiration dates during 2015-2016. In addition, the company's property portfolio has an average life of five years, which is in line with market standards. The large majority of the company's leases are renewed with positive rollover rates through-the-cycle leases, reflecting continued demand for lease space in Brazil. The company also has a low tenant concentration, as the top-20 tenants account for less than 10% of its revenues.
Stable Margins
The company's revenues are stable given the characteristics of its lease portfolio, with a steady base of fixed-rent income and lease expirations. The fixed-rent component represents approximately 83% of the company's total income rent. The tenant payments cover property management costs and taxes comfortably, resulting in EBITDA margins of around 71.5% during the last three years. Aliansce's net revenues and adjusted EBITDA were BRL509 million and BRL372 million,- respectively, during the last 12-month (LTM) period ended March 31, 2015. The company's LTM March 2015 EBITDA margin was 73%. Fitch expects the company to keep its EBITDA margin stable at the current level.
Moderate Leverage
Aliansce's total net debt/EBITDA ratio was 4.2x as of March 31, 2015, which positively compares with 4.8x as of March 31, 2014. The company had BRL1.9 billion of total debt as of March 2015, composed of local debentures, mortgage-backed securities and bank loans. All the company's debt is secured and is denominated in local currency, which reduces FX risk, as its revenues are also denominated in local currency. Fitch expects the company's net leverage to remain around 4x during 2015-2017 driven by higher EBITDA levels as the company's portfolio include new malls with step-up clauses taking place during this period.
KEY ASSUMPTIONS
--EBITDA margin for 2015-2016 around 72%;
--Total adjusted net leverage for 2015-2016 around 4x;
--Interest coverage (EBITDA/gross interest expenses) consistently around 2.3x during 2015-2016.
RATING SENSITIVITIES:
A combination of the following factors could lead to a positive rating action: capital structure, liquidity and loan to value ratios associated with the transaction above the expectations incorporated in the rating. Fitch would consider a negative rating action if the company's financial profile or the loan to value ratio associated with the transaction deteriorate, reaching levels consistently below those incorporated in the rating.
LIQUIDITY
Aliansce's liquidity is viewed as adequate due to its cash position, manageable debt payment schedule, and satisfactory levels of unencumbered assets. As of March 31, 2015, the company's cash and marketable securities position was BRL337 million, with BRL275 million of short-term debt, resulting in a cash and marketable securities to short-term debt ratio of 1.2x. The company's cash position is expected to improve during the second half of 2015 with the proceeds from the sale of its 35% stake in Via Parque Shopping for approximately BRL135 million; the transaction is pending approval from Brazil's Council for Economic Defence CADE. In addition, Aliansce maintains total GLA of approximately 41,000 sqm that is unencumbered with an estimated market value in the BRL400 million to BRL 500 million range. These assets provide financial flexibility, as they could be used in the future to access financing. The company's gross interest coverage ratio was 2.5x during the LTM march 2015.
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