Fitch Affirms Cencosud's IDR at 'BBB-'; Outlook Remains Negative

miércoles 16 de abril de 2014 14:54 GYT
 

(The following statement was released by the rating agency) NEW YORK, April 16 (Fitch) Fitch Ratings has affirmed Cencosud S.A.'s (Cencosud) ratings as follows: --Long-term Issuer Default Rating (IDR) at 'BBB-'; --Local Currency IDR at 'BBB-'; --USD750 million unsecured notes due in 2021 at 'BBB-'; --USD1.2 billion unsecured notes due in 2023 at 'BBB-'. The Rating Outlook remains Negative. The Negative Outlook continues to reflect the company's weak capital structure with total adjusted debt-to-EBITDAR remaining high for the rating category. Execution risks remain as the company seeks to lower its adjusted gross leverage ratio to below 3.5x through the divesture of non-core assets. Cencosud's investment grade ratings reflect its solid regional market position, business and geographic diversification, critical size in the food segment relative to its main competitors, and important presence in the non-food retail segment. The high level of the company's unencumbered assets related to its real estate portfolio in the shopping center segment is also viewed positively, as are Cencosud's stable margins. Factors constraining the ratings include the company's high leverage, its exposure to Argentina's high sovereign risk, and the sensitivity of its financial (credit card) business to macroeconomic downturns. Despite recent refinancings, the company's liquidity is viewed as weak for the rating category. KEY RATING DRIVERS: Challenging Operating Environment, High Leverage Cencosud faces a challenging operating environment in 2014 driven by the deceleration and integration risks in Brazil, moderate growth in Chile, and increasing political and economic risks in Argentina. In general, Fitch believes the outlook for the consumer in Latin America is weak in 2014. The combination of these factors could limit Cencosud's revenue growth and add some pressure to the company's margins. Cencosud's 2014 revenue growth rate is projected to be lower than 2013 - in the single digits, while its EBITDA margin is expected to be around 7%. Cencosud's cash generation, measured as EBITDAR, was USD1.8 billion during 2013. The company had USD7.9 billion in total adjusted debt as of Dec. 31, 2013. Its debt consisted of USD5.6 billion of on-balance-sheet debt and an estimated USD2.3 billion of off-balance-sheet debt associated with lease obligations (rentals of USD341 million as of the LTM ended Dec. 31, 2013). The company's adjusted gross leverage (total adjusted net debt-to-EBITDAR ratio) and net adjusted leverage ratios were 4.3x and 4.2x, respectively, as of Dec. 31, 2013. Execution of Non-Core Assets Sale Key Factor The company's efforts to reduce its adjusted gross leverage will require the combination of an improvement in its FCF generation and the execution on non-core assets sale. During 2013, Cencosud's free cash flow (FCF) was negative by USD453 million due to USD643 million in capital expenditures and USD161 million in dividends. The company's FCF generation is expected to improve and be positive during 2014, reaching around USD200 million, driven by better working capital management and lower levels of capital expenditures and dividends. However, in order to achieve a significant reduction in debt levels the company will also need to execute the divesture of non-core assets. Improving Liquidity Post Recent Refinancing Cencosud maintains low levels of cash relative to its short-term debt, which is partially balanced by good credit access with local and international capital markets as well as with regional banks. As of Dec. 31, 2013, the company had only USD327 million of cash and marketable securities, which compares unfavorably with USD1.4 billion of short-term debt. Cencosud executed a major debt refinancing with regional banks during April, which, by extending its debt payment schedule resulted in a significant improvement in its financial flexibility. As a result, of this transaction, the company's debt service for 2014 was reduced by USD650 million and its obligations in 2015 were lowered by USD120 million. On a pro forma basis considering this debt refinancing, the company's cash-to-short-term debt is estimated at 0.45x. While Fitch views these transactions as positive, the company's liquidity remains low. Market Position and Real Estate Portfolio Incorporated Cencosud has a dominant position in the retail business in Chile, a strong market position in Peru, Argentina, and northeast Brazil, and a growing presence in Colombia. The company's operations in Chile, Argentina, Brazil, Colombia, and Peru represent approximately 54%, 26%, 8%, 6% and 6%, respectively, of its total adjusted EBITDA. The company operated 1,094 stores at the end of 2013 in different retail formats. The company also has 48 shopping centers. Cencosud's margins are stable, which reflects the predominance of the less-cyclical supermarket retail format and a very stable cash-flow-generation shopping mall business. These two business units represent around 58% and 21% each of the company's total adjusted EBITDA and partially mitigate the more cyclical nature of its financial services, department store and home improvement businesses. Positively factored into the ratings is the company's real estate property, mostly related to its shopping center business segment, with an estimated market value of approximately USD2.9 billion. Most of this property is unencumbered and 75% of the value is in Chile. RATING SENSITIVITIES: Positive Rating Action: A combination of the following factors would result in revising the Negative Outlook and affirming the ratings: Successful divesture of non-core assets combined with achieving positive FCF levels resulting in material reduction of debt levels with the company's adjusted gross leverage reaching levels below 3.5x Negative Rating Action: A combination of the following factors would result in a rating downgrade: Failure to execute non-core asset divestures or deterioration in the company's FCF generation - driven by levels of cash flow from operations, capex or paid dividends not in line with expectations - resulting in poor or negative FCF margin and limited debt levels reduction. Contact: Primary Analyst Jose Vertiz Director +1-212-908-0641 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Andrea Jimenez Associate Director +562-24993322 Committee Chairperson Joseph Bormann, CFA Managing Director +1-312-368-3349 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 5, 2013). Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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