OREANDA-NEWS. Fitch Affirms MRV's Rating at 'AA-(bra)'; Outlook Stable Rio de Janeiro Fitch Ratings has affirmed MRV Engenharia e Participacoes S. A.'s (MRV) long-term national scale rating at 'AA-(bra)'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

MRV's ratings are supported by the company's capacity to preserve its conservative and strong credit metrics in an unstable business environment with sales speed above the industry average and low inventory of concluded units. MRV has been efficient in managing low leverage, adequate debt profile and satisfactory liquidity. Combined with positive operational cash flow generation on a recurring basis, this contributed to satisfactory support of the company's corporate debt maturities and its business base.

The level of cancelled sales contracts reported by MRV remains high and is a concern. Low inventory of concluded units indicates that the company has been efficient in reselling the units cancelled, and MRV has the challenge to preserve low inventory in weak market conditions. The difficult macroeconomic and political conditions in Brazil continue to pressure the homebuilding sector, which is highly correlated with the local economy and is strongly vulnerable to an economic slowdown, higher unemployment and interest rates, lower consumer confidence and restrictions in lines of credit. This scenario will further pressure sales cancellations and inventory and reduce the homebuilders' capacity to resell its units.

KEY RATING DRIVERS

FCF to Remain Strong

For 2016 and 2017, Fitch expects free cash flow (FCF) to remain positive and above BRL500 million with support from the stabilization of the company's project launches between BRL4 billion and BRL5 billion. In the LTM ended March 2016, MRV reported FCF of BRL775 million. In this period, EBITDA was BRL782 million, funds from operations (FFO) was BRL424 million and CFFO, BRL1 billion, positively affected by important volume of receivables transferred to banks of 29,807 units in 2015. Strong FCF generation could lead to a change in the company's current dividend distribution policy and/or to a more active share buyback program.

Higher sales under the simultaneous sales model contributed to shorten a key variable, the cash cycle. However, the level of 'pro-soluto' after keys, which contemplates the part of homebuyers financing by MRV, significantly increased since year-end 2014, to BRL318 million in March 2016. This adds risks to MRV, as the company assumes the homebuyer credit risk after keys delivery, without any guarantee and/or fiduciary lien of the unit, and with high delinquency rates. MRV's business model benefits from standardized projects financed by appropriate funding sources. The company's working capital needs positively distinguish it from its Brazilian peers in the sector due to its shorter construction cycle.

Challenging Environment Continues to Pressure Cancellation of Sales Contracts

MRV still has the challenge to reduce its high sales cancellations. The company reported cancellation of sales contracts of BRL1.6 billion in 2015 and BRL320 million during the first quarter of 2016. High sales cancellation is a result of the bank's more restricted credit policy, weaker consumer confidence and lower disposable income of homebuyers. MRV was able to resell about 93% of the units in 2015. Fitch expects cancellation of sales contracts to remain high in 2016, pressured by weaker macroeconomic environment. However, with higher sales under the simultaneous sales model, the volume of sales cancellation should gradually reduce in the next few years.

High Dependence on MCMV Program

MRV has the challenge of its business strategy for the low income sector, which is more exposed to the cyclical nature of the homebuilding sector. This makes the company more vulnerable to government policies for the sector, especially in the segment covered by the Minha Casa Minha Vida program. The unstable political environment in Brazil, combined with unclear government financing capacity, creates uncertainties about the scope and stability of the program. MRV's business strategy is to concentrate project launches under the bracket 2 and 3 of the program, which are dependent on Fundo de Garantia do Tempo de Servico (FGTS) subsidies, and not on National General Budget. MRV's strong dependence on Caixa Economica Federal (Caixa) and Banco do Brasil S. A., the main financing agents in its business, are also risk factors.

Net Leverage to Remain Low

MRV's leverage is low and should continue to reduce as the company's operating cash flow generation remain strong. Fitch projects leverage, measured as net adjusted debt/EBITDA ratio, not to exceed 1.0x. In the LTM ended March 2016, the ratio was 1.3x. Fitch incorporates in the ratio BRL581 million of debt guaranteed by MRV. From December 2014 and March 2016, net adjusted debt fell to BRL990 million, from BRL1.5 billion.

The cash flow ratio, measured as total receivables on the balance sheet plus total inventory plus revenue to be booked over net debt plus acquisition of property for development plus cost to be incurred of units sold remained strong at 2.6x in March 2016.

MRV's support to its subsidiaries increased. As of March 31, 2016, the company guaranteed about BRL581 million of debt from its subsidiaries, LOG Commercial Properties e Participacoes S. A., Prime Incorporacoes e Construcoes S. A., MRL Engenharia e Empreendimentos S. A. and Urbamais Properties e Participacoes S. A. Fitch expects additional support from MRV to its subsidiaries through additional debt guarantees and/or capital increase, as companies have weak liquidity, pressured operating margins and high cash burden from financial expenses. Fitch's projected FCF already incorporates some additional support.

Adequate Operating Margins

MRV's operating margins remain adequate. Since 2014, margins range between 15.5% and 16.6%. Fitch's base case scenario expects EBITDA margin of 16% for the next two years. Sales speed reduced in the last quarters due to instable business environment, but the company was able to preserve sales speed above sector average. Total pre-sales net of cancellations of sales contracts/supply ratio was 13% in the first quarter of 2016, compared to an average of 15.3% per quarter in 2015. As of March 31, 2016, inventory had estimated market value of BRL6 billion, of which only 5% was related to finished units.

KEY ASSUMPTIONS

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

--EBITDA margin around 16%;

--CFFO of BRL800 million to BRL1 billion in 2016-2018;

--Project launches between BRL4 billion and BRL5 billion;

--Cash position to remain strong;

--Net adjusted leverage below 1.5x.

RATING SENSITIVITIES

Future developments that may individually or collectively lead to a negative rating action includes:

--Cash-to-short-term corporate debt coverage falls to below 1.3x;

--Net adjusted leverage above 3.0x on a recurring basis;

--Perception of deterioration of the company's inventory quality;

--Total receivables on the balance sheet plus total inventory plus revenue to be booked over net debt plus acquisition of property for development plus cost to be incurred of units sold ratio consistently below 2.5x;

--More unstable macroeconomic environment, which could impact the homebuilding sector's fundamentals, and changes in the government policies for the sector.

Future developments that may individually or collectively lead to a positive rating action includes:

--Rating upgrades are unlikely in the short term.

LIQUIDITY

MRV has preserved high liquidity. As of March 31, 2016, cash and marketable securities was BRL2 billion, compared to total adjusted debt of BRL2.9 billion, including BRL581 million of debt guaranteed by MRV. The company had BRL1.3 billion of debt maturing from April to December 2016 and BRL1 billion in 2017, of which BRL1.1 billion and BRL537 million, respectively, are corporate debt. About BRL463 million of off balance debt is due up to December 2017. Fitch views MRV's debt amortization profile as manageable and supported by adequate liquidity and positive cash flow generation. Between April and June 2016, the company concluded the issuance of about BRL390 million. Fitch considered a BRL500 million corporate debt amortization in 2016.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

MRV

--Long-term national scale rating at 'AA-(bra)';

--6th debentures issuance, in the amount of BRL500 million, due in 2017 at 'AA-(bra)';

--7th debentures issuance, in the amount of BRL300 million, due in 2016 at 'AA-(bra)'.

The Rating Outlook is Stable.