As the developer (NYSE: GFA) “starves” for cash, it has communicated its plans to raise R$230 million by issuing promissory notes, a short-term debt instrument which has not yet been detailed by the company. It will pay a hefty 14% interest for a one-year maturity (125% of DI), considered a high yield for such a large company. Just to put this in perspective, Lojas Americanas in April, issued R$500 million in promissory notes with a 10.5% yield and seven months maturity.
According to Estadao, the company has been paying a high price for the rush to grow fast since 2007. The company had a difficult 2011 and lost half its market value. In addition, its net income dropped 67% in 3Q and its debt level has exceeded 75% of total assets. Its restructuring plan even includes layoffs.
The real estate sector is very capital-dependent. The more the company grows, the more it needs capital and the more leveraged it becomes. Gafisa raised a lot of money and went on a land buying spree without a good execution plan. It is paying the price for having partnered in 2005 with a private equity firm (GP Investimentos and Sam Zell) which has its business model based on “leverage, quick returns, and exit”. So, the main question is: why Sam Zell sold out his Gafisa shares early this year?
One can only assume that he “smelled” the signs of bad times ahead…