OREANDA-NEWS. Fitch Ratings has upgraded Servicios Corporativos Javer, S.A.B de C.V.'s (JAVER) local and foreign currency Issuer Default Ratings (IDRs) to 'B+' from 'B'; Fitch has also upgraded JAVER's outstanding USD159 million senior notes due 2021 to 'BB-/RR3' from 'B+/RR3'. The Rating Outlook is revised to Positive from Stable.

The ratings upgrade reflects JAVER's strengthened financial profile after the company completed its Initial Public Offering (IPO) which consisted in selling among investors 34% of the company's equity. Proceeds from the IPO were used to reduce the company's indebtedness. The total amount of net proceeds obtained was MXN1.748 billion. Previously, the company launched on Dec. 18, 2015 a tender offer for its senior notes due in 2021 and became effective on Jan. 19, 2016, in which USD136 million of the notes outstanding were repurchased with the IPO funds and cash on hand. In addition, the company had repurchased in the open market around USD25 million of the senior notes, which represented a total debt reduction of USD161 million.

The pro forma effects of these transactions results in a total debt of MXN2.539 billion from MXN4.795 billion registered at the end of December 2015. Total leverage (total debt at face value/EBITDA) and net leverage are estimated to be 3.0x and 2.6x respectively, which compares favourably to 5.6x and 4.4x as of fourth-quarter 2015.

The Positive Outlook reflects the company's financial profile reconfiguration which should translate in additional operating flexibility in the form of lower interest expense, lower exposure to foreign currency debt mismatch with local currency cash flows, and stronger credit metrics. The IDRs could be upgraded if the company successfully refinances the remaining dollar-denominated debt with a new Mexican peso-denominated instrument, maintains its target of positive free cash flow (FCF) generation through the business cycle, in conjunction with a total debt to EBITDA approximating 2.5x.

JAVER's ratings reflect the company's solid business position as the national leader in houses sold through Infonavit (17,501 units), land reserves equivalent to five years of production and focus on positive FCF generation. The ratings are limited by the company's limited geographic diversification and high dependency in Infonavit system.

KEY RATING DRIVERS

Leading Market Position:
JAVER is the leading homebuilding company in Mexico based on the number of units sold through the Infonavit system. During 2015, the company sold 17,501 units through Infonavit, out of a total of 18,565 homes sold. The company holds a leading position on its main markets (states of Nuevo Leon and Jalisco). JAVER has presence in states with the highest income per capita (Nuevo Leon, Jalisco and Queretaro) and positive economic and population growth trends (Queretaro and Estado de Mexico) that have a positive relation with the number of available mortgages through the Infonavit system.

Ability to Adjust Sales Strategy:
The company has shown the ability to adjust its sales strategy according to market dynamics. JAVER has the ability to adapt the prices of its inventory of units ready to be sold. Given the uncertain market conditions regarding subsidies to low income houses, the company was able to change its sales strategy, changing the sales mix towards increased middle-income houses. By the end 2015, 62% of the company units sold were middle-income houses compared to 47% in 2014.

Limited Geographic Diversification:
Historically, total revenue has been concentrated in only two states. As of Dec. 31, 2015, 77% of the total revenue was generated in 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. This concentration has been decreasing slowly as the company enters other markets such as Estado de Mexico and Quintana Roo.

Focus on Positive FCF:
JAVER strategy is focused in generating positive FCF. During the past four years, the company has managed the investment in working capital in order to generate FCF. Management initiatives include increased inventory rotation through price adjustments, which in turn can have an impact on profitability, but lowering the inventory levels. As of Dec. 31, 2015, JAVER's FCF was MXN235 million, which compares favourably with MXN71 million generated in 2014. Fitch expects that JAVER will continue with the strategy to maintain working capital days at current levels in the coming years.

Improvement in Credit Metrics:
The repurchase of USD136 million of the outstanding senior notes of the company has improved its leverage levels. As of Dec. 31, 2015 and due to the Mexican Peso depreciation in 2015, total leverage and net leverage increased to 5.6x and 4.4x respectively from 5.3x and 3.9x in 2014. The pro forma total leverage and net leverage of the company, after the debt reduction, are 3.0x and 2.6x respectively. The company is working to refinance the remaining USD159 million through the issuance of a peso denominated credit facility, in order to improve financial cost, eliminate foreign currency debt exposure and extend the debt maturity profile. Fitch estimates total adjusted leverage between 3.0x and 2.5x and adjusted net leverage ranging between 2.6x and 2.2x in the next 24 to 36 months.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for JAVER include:

-- Sales volume (housing units) average growth of 9% for 2016-2017;
-- JAVER's low-income units sold in 2016 resume growth;
-- EBITDA margin around 14%, similar to current levels;
-- Land capex within historic levels needed to replace deployed land reserves;
-- Dividend payments increase to up toMXN400 million per year.

RATING SENSITIVITIES

Considerations that could lead to a negative rating action include:
-- Weak operational results with sales volume decreases and EBITDA margin reduction below current level of 14%;
-- Land capex levels substantially above current expectations of investing to replace land reserves used;
-- Consistent negative FCF generation driven by increasing working capital needs due to slow inventory rotation;
-- Total debt to EBITDA consistently above 3.0x.

Positive rating actions can derive from the combination of the following factors:

-- Strong operational results, reaching targets of housing units sold in the near future, while maintaining EBITDA margin at current levels, and continued positive FCF generation;
-- Strengthening of the company's leverage ratio (total debt/EBITDA) to 2.5x;
-- Refinancing of the outstanding USD159 million notes due 2021 with a peso denominated credit facility and elimination currency mismatch between cash flows and debt.

LIQUIDITY

JAVER's liquidity related to debt maturities and projected investments remains strong. The company changed their financing strategy from short-term debt and bridge loans financing to longer-term debt with the issuance of the senior notes due in 2021. As a result of this strategy, as of Dec. 31, 2015, the company's short-term debt represented 0.5% of the total debt. The capex plan for the next years is expected to be funded with the internally generated cash flow and cash on hand.

FULL LIST OF RATING ACTIONS

Fitch has upgraded the following ratings:

Servicios Corporativos Javer, S.A.B. de C.V.
--Long-term Issuer Default Rating (IDR) to 'B+' from 'B';
--Local currency long-term IDR to 'B+' from 'B';
--USD159 million due 2021 senior unsecured notes to 'BB-/RR3' from 'B+/RR3'.

The Rating Outlook is revised to Positive from Stable.

The Recovery Ratings are 'RR3', which indicates good recovery prospects given default. 'RR3' rated securities have characteristics consistent with securities historically recovering 51%-70% of current principal and related interest in an event of default.