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Gafisa S.A. Message Board

  • aco_brasil0192 aco_brasil0192 Feb 22, 2013 7:31 AM Flag

    Reposting ABCD's Comments on Debt

    ABCD, this was such a thorough posting, I think it needs its own thread and some detailed responses. Thanks for putting the time into this. I'm going to look into a few of the points made here sometime today.


    It's all about the debt - - -

    Is it because they have not been able to roll over - or roll forward - the substantial amount of debt they have coming due in the next 8 months? Why haven't they rolled this debt over sooner - is it because they can't? I was really surprised when I re-read the November 13th Conference call and the question by the Morgan Stanley analyst - Nicole Hirakawa:

    "Nicole Hirakawa -- Morgan Stanley

    "...Good morning. My question is about the debt level. You have a corporate debt coming due the next eight months about BRL 1.5 billion it seems. And I’d like to know what you’re doing about that - maybe willingness to hand over or do you think you have enough cash to cover this, or will this be conditioned on selling a stake in Alphaville?

    "..And also one of the covenants is 2.22 twice and the minimum is 2.2. So what do you think will happen with this covenant in the next quarter? I know it depends on the volume of receivables and I imagine that it’ll continue to drop. Perhaps you could say a little bit more about that. Thank you.

    Andre Bergstein - CFO and IRO

    "..Hello Nicole, this is Andre. Regarding the question of the debt in the next 12 months in terms of total debt, we have BRL 1.4 billion and this is reasonably split up 50% or more which is 50% of corporate debt. And as far as corporate debt goes in some cases, we have rolled out also – rolled over the covenant. The Tenda debenture is one case where we rolled it over partially. We decreased the amortization and now in October of this year (2012) and next year (2013) and extended the term.

    "...So this improves our cash flow; and then currently there is another debt which is coming due at the end of the year, BRL 150 billion (amount?), although it still appears on the report like the others.

    "...In fact, there was not; (rather) it will decrease BRL 150 million and also some other (debts) which we are paying off. So with this partial movement of rollover and also some payoff, we are in a comfortable situation vis-à-vis the payment of the debt which is coming due (and also the – which help also and also with the transfer)(?).

    "..The other point that you mentioned, in fact there was a mistake which we adjusted; and this covenant took into account the receivables but not the cash.

    So anyway, this has been reported in this last quarter. Now at the beginning of October, we have already been talking about this and they are in fact, very close to the limit, and now it is much more inconsistent – consistent with the reality of the covenant. Would you believe that these amortizations for the next 12 or 18 months or so are dealt with? (And regardless of the needs of high – taken out of you or...) {What's that phrase mean?}

    Duílio Calciolari - CEO
    Yes, yes. Yes, it will be dealt with with the cash flow, and we will not have to sell any assets. Thank you.


    Lastly (my comment), if they have 11.6 BL in receivables and inventory (as the CFO says on this call), that's $55/share. The company seems ridiculously undervalued at $3.89/share

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    • My conclusion is that this drop is a technical correction and a move to safety by a number of investors.

      The debt rollover is not an issue. Here's why:

      1. The company as of 4Q has R$1.6b in cash. I would be surprised if their net cash position has not increased since then.

      Payment schedule per 3Q release (pg22) clearly lays out the covenants:

      Due by Sept 2013: R$1,418b
      Due by Sept 2014 R$1,259b
      Due by Sept 2015 R$776m
      Due by Sept 2016 R$359m
      Due after Sept 2016 R$36m

      Here is the ratio, the reporter was referring to:
      (Total receivables + Finished units) / (Total debt) ≥ 2.2x 2.22

      "Lastly (my comment), if they have 11.6 BL in receivables and inventory (as the CFO says on this call), that's $55/share. The company seems ridiculously undervalued at $3.89/share"

      The question boils down to costs of completion and the fluxuating appraised value of unsold inventory. I'm not an accountant, but I understand the receivables to include all contracted property.

      Page 21 has a great summary of inventory status including a graphic detailing completion status of ongoing projects.

      • 4 Replies to aco_brasil0192
      • Up 6% today on low volume = dead cat bounce.

      • aco_brasil0192

        Thank you for writing. At least we are finally talking about something real rather than bollinger bands and support levels (real too, but only after the fact). There has been a ton of selling the last 4 days, and for 12 days straight - on high volume and NO NEWS. That means the company is trading on non-public news and institutional shareholders are being shaken out, scared out, or rightfully stepping to the sidelines. Everyone who has "bought into" a turnaround in the company since mid-August (6 months) now has nothing to show for their investment. Zeroed out. Except for the May-July, 2012 period when the company dropped to generational lows, and was left for dead, when the volume completely dried up (as in, left for dead), we are right back at the point that it all began. So this is kiss and tell time. The company is either viable or it isn't. You said the debt-rollover is not an issue; the company said it was not an issue; well, obviously, someone thinks it's an issue if they only have 8 months to refinance (cliff-hanger) and the stock has dropped 25% for 15 days straight.

        Debt - and managing debt effectively - is what makes the fat lady sing for builders. You don't do it right - you can have a ton of nice (but unpaid for) assets - and yet still go out of business. Think Phoenix, AZ, 2006-2011. When a company has a subprime unit (Tenda) right before a recession, the first people to default at the first sign of weakness in that economy, are the sub-prime folks. They are not evil. They are just broke, and should never have been given a loan for a house in the first place. But ah - those "wise" governments who want to repeal the business cycle and increase home ownership among the poorest of the poor.

        So a builder has to borrow to build, and then sell what he's built to pay-off what he's borrowed. The ONLY way to get out of a near-term conundrum like the one that Gafisa's now in is if they have INCREASED sales or revenues, enough to stay ahead of the grim reaper.

        In 8 months debt is coming due? That's like next week for a builder's balance sheet and/or for its creditors. A similar company in the U.S. that was in the same position in early 2012 was KB Home (KBH). Fortunately, for them, the CA real estate market turned on a dime in January, 2012, they were able to push their near term debt out 5 years, and during 2012 they were able to progressively push out almost a $1BL in maturities 5 to 7 years in the future at the same time that business began to boom. In a single year they doubled their cash position and pushed almost ALL their debt out 5 to 7 years. The important thing for GFA is the business-side. Are houses selling? Is cash increasing? Then a bank will give take a chance and give them a loan to "push out" of this hard spot. If the business is NOT THERE, then they are toast (and I can say stupid, stupid, stupid to myself for owning this dog, having a 25% profit, and watching it all wiped out in a week or two).

        Alphaville is their one profitable (it sells houses to the middle class) unit. Why the hell would they sell that to cover debts for their subprime unit? Doesn't make sense. If they sell their money-maker, then how do they make money? That would be a BIG MISTAKE. But maybe the debt-guys are getting nervous and FORCING the sale ("You pay off your near term debt, or else").

        So those are my two observations, maybe three:

        1) 8 months to go with a lot of debt coming due is ridiculously stupid management. That's like cliff-hanging. But what if they have/had no choice? Then it means the financial shape of the company is in such bad shape that no one is willing to take a chance on them. The only thing that will save them is business picks up.

        2) You don't sell your big money maker to cover losses. You get out of the losing division as best as you can so you can leave to speak of another day. You don't "expand" in a recession. You hunker down, so you can leave to speak of another day.

        3) It sounds like their big concentration in the future is in Rio and Sao Paulo and they said they have NO TROUBLE selling houses there (location, location, location).

      • A few metrics over the last four quarters:
        1) EBIT/Interest expense: increase from 0.8x to 1.3x
        2) Net Debt/(EBITDA-Capex): decrease from 28x to 8x
        3) Average Days Sales: from 401 to 305
        4) Total debt/Equity: 87% to 139%
        5) Total debt/Capital: 46% to 58%

        The last two suggest to me that while the market is not willing to value the equity higher, their debt to capital ratio remains very manageable.

      • great post Aca. thx

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