OREANDA-NEWS. Fitch Ratings has placed BR Properties S.A.' (BR Properties) ratings on Rating Watch Negative as follows:

--Long-term foreign currency Issuer Default Rating (IDR) 'BB';
--Long-term local currency IDR 'BB';
--USD285 million senior unsecured perpetual notes 'BB';
--Long-term national scale rating 'AA-(bra)'.

The Watch Negative reflects high uncertainties of a potential tender offer's impact on BR Properties' credit metrics, depending on the final structure of the transaction. In Fitch's view, the reorganization structure, with the spin-off of assets, may result in a less diversified and weaker portfolio of properties, with lower cash flow generation capacity. The limited disclosure about the conditions of the possible transaction and the spin-off of assets adds uncertainties to BR Properties' credit profile, which may be affected depending on the company's capital structure after the transaction relative to the assets that will remain under its control.

An eventual final structure of the transaction that results in a considerable increase in leverage and weaker interest coverage ratios could result in a downgrade of BR Properties' ratings. Higher dividends distribution, if financed by the company's operational cash flow generation or by new debt, could also pressure the ratings. If the tender offer's final conditions preserve the company's capital structure and leverage and interest coverage ratios, and liquidity policy in line with current strategy, the Watch Negative could be removed.

BR Properties received Letter of Intention for a voluntary takeover of its shares on Feb. 26, 2015. The proposed transaction would result in a spin-off of the company's assets, with a reduction of BR Properties' portfolio to 36 assets, with a gross leasable area (GLA) of about 431 thousand square meters (sqm), from the actual 57 properties with GLA of 965 thousand sqm. Following the proposed conditions, BR Properties would be controlled by Fundo de Investimento Imobiliario - FII Prime Portfolio after the transaction concludes, with a minimum 85% participation on the company's capital, and managed by BTG Pactual Servicos Financeiros S.A. DTVM. The remaining properties would be controlled by BTG Investments and Brookfield BR7, LLC.

KEY RATING DRIVERS

Operational Cash Flow to be Pressured by Challenging Macroeconomic Environment

BR Properties benefits from a predictable cash flow from lease agreements. In 2014, the company generated BRL911 million of EBITDA and included about BRL172 million of gains from the sale of 61 properties. Recurring EBITDA was BRL739 million during the year. Fitch projects EBITDA to reduce to about BRL600 million, not including adjustments for the success of the Tender Offer, if vacancy rates increase to 15% for office and warehouse segments and leasing spreads are below inflation rate. The company's capacity to continue to generate adequate cash flow is strongly correlated to domestic market conditions, once demand for commercial properties is directly related to Brazil's macroeconomic conditions.

In 2014, BR Properties generated BRL25 million of FFO and negative CFFO of BRL19 million, compared to BRL168 million and BRL194 million, respectively, in 2013, as per Fitch's calculation. This reduction was due to punctual factors related to the sale of assets and acquisition of participation in one SPE, and CFFO should improve to about BR150 million in 2015. High dividend distribution of BRL1.8 billion and investments of BRL195 million resulted in a negative FCF of BRL2 billion in 2014, covered by the sale of assets of BRL3.1 billion.

Leverage to Remain Moderate in the Medium Term

BR Properties' ratings incorporate Fitch's expectation that the company's net leverage will be between 5.0x and 5.5x in the medium term. In 2014, net debt/EBITDA ratio reduced to 3.9x, from 5.7x in 2013, and benefited from greater cash generation from sale of assets. Considering only recurring EBITDA, net debt/recurring EBITDA ratio was 4.9x. In 2014, net debt reduced by BRL1 billion, to BRL3.6 billion in December 2014, as BR Properties used part of proceeds from the sale of assets to amortize debt. Relative to the value of the company's property portfolio, leverage is manageable with a loan-to-value ratio of about 40% and 34% on a net basis, in December 2014.

Manageable Liquidity

BR Properties has a prudent risk management policy and has preserved an adequate cash reserve to cover annual debt amortization and an eventual increase in the vacancy rates. As of Dec. 31, 2014, the company reported cash and marketable securities of BRL595 million and BRL4.2 billion of total debt. Cash conservatively covered 2.1x short-term debt of BRL286 million, and Fitch considers the concentration of debt maturities of BRL594 million in 2016 and BRL604 million in 2017 manageable. Fitch also expects EBITDA to gross interest expenses ratio above 1.3x in 2015 and 2016, compared to 1.7x in 2014 and 1.3x if only recurring EBITDA is considered.

BR Properties financial flexibility from its unencumbered assets improved in 2014. As of Dec. 31, 2014, about BRL2.7 billion of total debt was guaranteed by receivables from rental agreements or by the properties. Unencumbered assets had an estimated market value of BRL3.9 billion, which may be available for sale or serve as collateral for a secured financing, if needed. The estimated value of unencumbered assets covered about 2.6x of unsecured debt of BRL1.5 billion.

Cyclicality of Commercial Properties Business

High vacancy rate remains as a concern. At the end of 2014, financial vacancy rate was 8.5% and physical vacancy was 7.2%, compared to 8.6% and 4.1%, respectively, in 2013. Higher stock in the market also contributed to lower leasing spread, of 3.9% in 2014, considering same properties, and lower than average inflation rates. BR Properties' lease contract expiration timeline continues well distributed, with 15% of the contracts (by revenues) expiring up to the end of 2015 and 10% in 2016. The company has maintained low delinquency rates, even under diverse macroeconomic conditions.

The company's properties have a favorable leasing profile with tenants representing a cross section of industries. Fitch also considers high the customer concentration, with the five and 10 largest tenants representing about 45% and 54%, respectively, of the company's revenues in 2014. BR Properties is the leader in the Brazilian commercial properties segment, with high quality assets, and had 57 properties, with 965 thousand sqm GLA and an estimated market value of BRL10.5 billion as of Dec. 31, 2014.

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

--Projections do not include adjustments for the successful of the Tender Offer, as final conditions of the agreement are yet to be defined;
--No sale of asset or acquisition of new properties;
--Vacancy rates between 10% and 15%;
--Increase in average rent below inflation rates.

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

--Increase in net leverage to levels above 6.0x;
--EBITDA to gross interest expense coverage ratio below 1.2x.
Liquidity falling to levels that considerably weaken short-term debt coverage;
--Vacancy rates consistently above 10% and higher delinquency rates, which could result in a reduction in operational cash generation;
--Sale of assets that results in a less diversified and weaker portfolio of properties, with a significant reduction of the company's cash flow generation capacity.

Positive rating actions are not expected in the medium term.