Tecnisa : Standard & Poor´s 2015 rating

Ratings 'brBBB+' da Tecnisa S.A. reafirmados após anúncio de aumento de capital; perspectiva permanece estável

Publication Date: June 27, 2016

Press Release Tecnisa S.A.'s 'brBBB+' rating affirmed after announcement of capital increase; outlook remains stable

Primary analyst: Wendell Sacramoni, São Paulo, 55 (11) 3039•9741, wendell.sacramoni@spglobal.com

Additional analyst contact: Camilla Dolle, São Paulo, 55 (11) 3039•9753, camilla.dolle@spglobal.com

Rating committee leader: Luísa Vilhena, São Paulo, 55 (11) 3039•9727, luisa.vilhena@spglobal.com

Summary

We expect that Tecnisa will present stronger free operating cash generation in the coming quarters with the delivery of its Jardim das Perdizes project. At the same time, the Company's recent announcement of a capital increase and its asset monetization initiatives should substantially improve its capital structure.

These factors should offset the exceptionally low volume of Tecnisa's launches in the coming quarters and our expectations of a high level of cancellations due to the economic scenario. Tecnisa's 'brBBB+' rating is affirmed on a Brazil National Scale, including its issuance ratings. The corporate rating outlook is stable.

The stable outlook reflects our expectation of strong free operating cash flow over the coming quarters, as well as the capital increase and asset sales, which should be utilized to significantly reduce debt levels over the next 12 to 18 months.

Rating Action São Paulo (S&P Global Ratings), June 27, 2016 - S&P Global Ratings today affirmed Tecnisa S.A.'s ("Tecnisa") 'brBBB+' rating on a Brazil National Scale. We also altered the Company's senior unsecured debt recovery rating of '4' in case of default, which reflects our expectations of an average recovery (between 30% and 50%), but now in the higher portion of the range. Its corporate credit rating outlook is stable. Fundamentals

On June 23, 2016, Tecnisa announced a capital increase of up to R$200 million, to be carried out by the current shareholders together with Cyrela Brazil Realty S.A. Empreendimentos e Participações (BB/Negative/•• and brAA•/Negative/••). The transaction depends on the approval of Brazil's antitrust agency, which is expected to be concluded within the next two months. We believe that this initiative, along with other business initiatives such as the sale of its non-strategic assets and holdings in projects, as well as the substantial reduction in its launches, will result in a significant cash reduction in the next two years through inventory sales and the transfer of receivables, strengthening its liquidity and capital structure through the settlement of corporate debt. In our view, these factors offset FFO/debt and cash interest hedge/FFO ratios' poor metrics, which should be below 12% and 2.0x, respectively, during this period.

We believe that, with this strategy, Tecnisa will be able to face the construction industry's challenges amid a scenario of high inflation, interest, unemployment and household debt. These factors, together with credit restrictions, have directly impacted the sector causing a significant weakening in property demand, a drop in growth rates and the maintenance of high levels of cancellations. Consequently, inventory levels in the main Brazilian markets remain high despite the substantial drop in the number of new launches in recent years, pushing most companies to offer discounts, increasing competition and pressing the sector's profitability.

We have revised our business risk profile evaluation from "weak" to "vulnerable" in the belief that Tecnisa's operating efficiency has suffered due to its excessively large land bank, compared to the number of launches expected in the coming years, and we do not believe the planned land sale strategy will be sufficient to significantly reduce this land bank. Additionally, other factors restricting

Tecnisa's risk profile are the Company's smaller scale compared to some of its competitors and a high concentration of its cash generation coming from just a few projects. On the other hand, we highlight that Tecnisa remains among the construction industry's leading companies, with a strong brand, operating mainly in the São Paulo market.

We assessed its comparable rating analysis as "positive", reflecting our belief that Tecnisa is stronger than companies with a lower rating due to the expected improvement in its capital structure and cash position, the recently announced capital increase, its sale of non-strategic assets, the significant reduction in launches and the discounts offered to boost inventory sales.

Our base-scenario includes:

Potential sales value (PSV) of new launches of R$24 million in 2016 and R$130 million in 2017; Annual net revenue of R$650 million in 2016 and R$570 million in 2017, reflecting the lower volume of projected launches, an inventory market value of R$1.9 billion and revenue to be recognized of R$173 million at the end of March 2016;

EBITDA margin of 18.5% in 2016 and 16.2% in 2017, chiefly due to the discounts on the sale value of the properties and the recognition of projects with profitability lower than the Jardim das Perdizes project as of 2016;

Operating cash generation of R$615 million in 2016 and R$850 million in 2017 due to the high volume of deliveries, mainly related to the Jardim das Perdizes project and the sale of inventories;

Capital increase announced of at least R$170 million;

Investments of approximately R$8 million annually, mainly in information technology; and A dividend payout at a minimum of 25% of net income.

Based on these assumptions, credit metrics for the next two years should be: FFO/debt ratio of •1.5% in 2016 and 13% in 2017;

OCF/debt ratio of 63% in 2016 and 146% in 2017;

Cash interest/FFO ratio of approximately 0.9x in 2016 and 1.7x in 2017; and Debt/capital ratio of 35% in 2016 and 24% in 2017.

Liquidity

Tecnisa's liquidity is rated as "adequate". We expect cash input to exceed use by more than 1.2x in the next 12 months and to remain positive even if EBITDA falls 30% compared to our projection.

Tecnisa has solid relations with banks and has flexibility in the maturity of its debt, given that proximately 70% of its short-term debts are paid with receivables from financed projects. On the other hand, we believe the Company will not be able to absorb high-impact events with low probability without having to refinance and we do not regard its see its capital market reputation as high.

Currently, Tecnisa is in a comfortable position regarding its restrictive financial covenants, but has limitations in its covenant related to the corporate rating, in case it is downgraded to levels below 'brBBB+'.

Main liquidity sources:

Cash position of R$188 million on March 31, 2016;

Working capital generation estimated at approximately R$695 million over the next 12 months, due to the large volume of on-lending receivables during the year;

Capital increase totaling R$170 million; and

Project financing already approved of approximately R$1 billion.

Uses of cash:

Short-term debt of R$782 million on March 31, 2016; Negative FFO of R$21 million;

Investments of R$8 million over the next 12 months; and Dividend payment of R$56.4 million over the next 12 months.

Outlook

Our stable outlook of Tecnisa's corporate credit rating reflects our opinion that Tecnisa has adopted a conservative strategy in order to drastically reduce the volume of launches and selling, general and administrative expenses to face lower demand in the construction industry. Additionally, we believe that the recent capital increase is a further sign of the Company's efforts to improve its capital structure and liquidity. We expect the Company to present significant cash generation over the next 12 to 18 months, reducing its debt with metrics, such as debt/capital ratio below 40%, which will offset FFO/debt and FFO/cash interest ratio's poor metrics.

Downgrade scenario

Tecnisa's ratings could be downgraded if its cash generation was negatively affected by an unexpected increase in cancellations volume, lower sale of inventories or a delay in the process of transfer of receivables, resulting in free operating cash flow/debt ratio below 10% or debt/capital ratio above 50% over the next 12-18 months. In such a scenario, we could downgrade the rating by several levels, since the Company has a covenant that could be broken if its rating is downgraded to levels below 'brBBB+', accelerating its debt and jeopardizing its liquidity.

Upgrade scenario

In spite of considering it highly improbable due to the current situation of Brazil's real estate market, Tecnisa's ratings could be upgraded if there is a significant improvement in its credit metrics, with an FFO/debt ratio consistently above 12% and FFO/cash interest above 2x, maintaining a strong cash flow and debt/capital ratio below 40%. The Company could achieve these metrics releasing new projects that are able to generate a good sales pace together with high returns, with higher scale, or with the reduction of above expectations on its indebtedness levels.

RATING CLASSIFICATION TABLE

Tecnisa S.A.

Corporate Credit Ratings

Brazil National Scale brBBB+/Stable/••

Business Risk Vulnerable

• Country risk Moderately high

• Industry risk Moderately high

  - Competitive position Vulnerable

  Financial risk Aggressive

• Cash flow /leverage Aggressive

  Modifiers

• Diversification/portfolio effect Neutral

• Capital structure Neutral

• Liquidity Appropriate

• Financial policy Neutral

• Management and Corporate Governance Regular

• Comparable Ratings Analysis Positive

Recovery Analysis Key analytical factors

Tecnisa's third issue of debentures rating is 'brBBB+', and we changed its recovery to '4H', which indicates an average recovery (between 30% to 50%), at the top of the band.

We evaluated the recovery prospect through a simulated default scenario. In Tecnisa's case, we assumed a default in 2017. We believe that, in this hypothetical scenario, the default would result in a significant deterioration in the residential market due to an economic recession, resulting in a sharp drop in the company's cash flow generation.

In a default scenario, we believe that Tecnisa's assets would be settled, given the high intrinsic value of these assets. We assume a 10% reduction in the inventories' value, as well as discounts of 60% in the value of completed units, units under construction and land, resulting in a discretionary value of the Company's assets in a default year of R$1.2 billion, of which we subtracted R$60 million for expenses related to bankruptcy.

Payment priority structure (waterfall):

Company's net value after administrative expenses: R$1.2 billion Priority debts: R$923 million (labor obligations and project liabilities)

Senior secured debt: R$94 million (Bank Credit Certificate or CCB and the 4th issue of debentures)

Senior secured obligations: R$3 million (tax obligations)

Senior unsecured debt: R$400 million (CCB, 3rd issue of debentures and debts related to the acquisition of land)

Recovery expectation of the issue of senior unsecured debentures: between 30% and 50%, on the top of the band

Certain terms used in this report, especially certain adjectives used to express our view of factors that are important to the ratings, have specific meanings attributed to them in our criteria and should therefore be read together with said criteria. For additional information, see the ratings criteria at www.standardandpoors.com.br .

Criteria and Related Articles Criteria

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Metodologia: Fatores de créditos relativos à administração e governança para entidades corporativas e seguradoras, 13 de novembro de 2012.

Uso de CreditWatch e Perspectivas, September 14, 2009. Diretrizes de critério para ratings de recuperação de dívida em grau especulativo de emissores