August 8, 2017 / 4:05 PM / a year ago

Fitch Affirms Liverpool's IDRs at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) MEXICO CITY, August 08 (Fitch) Fitch Ratings has affirmed El Puerto de Liverpool, S.A.B. de C.V.'s (Liverpool) Long-Term Local and Foreign Currency Issuer Default Ratings at 'BBB+'. Fitch has also affirmed Liverpool's long-term National Scale rating at 'AAA(mex)'. The Rating Outlook is Stable. Fitch has assigned a 'AAA(mex)' rating to a pending MXN5 billion local issuance of Certificados Bursatiles. Proceeds from the issuance are expected to be used for refinancing purposes. A full list of rating actions follows at the end of this release. Liverpool's ratings reflect the company's leading business position in Mexico, geographic diversification, and multiple store formats, all of which support its consistently positive operating cash flow generation and ample financial flexibility. In addition, the consumer finance division and the real estate portfolio strengthen its existing retail operations. For the first six months of 2017, sales through the company's own credit cards accounted for approximately 46% of retail revenues. KEY RATING DRIVERS Strong Market Position Liverpool is the leader in the middle-, middle-high and high-income segment of department stores in Mexico. During the last 12 months (LTM) ended June 30, 2017, the company's retail revenues reached MXN94.7 billion, 13.4% above that of the same period in 2016. As of June 2017, the company operates 248 stores across 57 cities throughout Mexico: 89 under the name of Liverpool, 37 Fabricas de Francia, and 122 recently acquired Suburbia stores. The company also has 25 shopping malls operating in 16 cities and owns a non-controlling 50% stake in Grupo Unicomer Co. Ltd., which has more than a thousand stores selling consumer durable products in 24 countries around Central and South America and the Caribbean. Grupo Unicomer investment is recorded under the equity method of accounting. Format and Business Diversification Provides Stable Cash Flow Liverpool has a diversified revenue base. For the LTM ended June 2017, 88% of total revenues were contributed by its retail segment, 9% from its financial services division and 3% from real estate. During the first half of 2017 and excluding Suburbia's revenues, retail segment revenues grew 9% compared to the same period the year before, while same store sales (SSS) grew 5.2%, above the average of 4.4% for department store growth cited by the Asociacion Nacional de Tiendas de Autoservicio y Departamentales (ANTAD). Consumer Credit Division Supports Retail Business Fitch positively factors into Liverpool ratings the funding of its credit card portfolio which has been mostly with internal generated funds and has presented an effective loan portfolio management through the business cycles. During challenging economic times with high unemployment rates, Liverpool has restricted its credit offering and the limits of existing customers' credit lines to avoid excessive portfolio growth and high non-performing loan (NPL) rates. The company has an average NPL index of 4% during the last five years, and it has not been above 5% of the total gross loan portfolio. As of June 30, 2017, Liverpool had approximately 4.4 million credit card accounts. Suburbia's Acquisition Increases Liverpool's Leverage As of June 2017, Liverpool's consolidated adjusted leverage measured as total debt plus lease equivalent debt /EBITDAR was 2.2x, an increase from the 1.2x registered a year before due to the debt incurred to fund Suburbia acquisition. Fitch expects the company's consolidated adjusted leverage to be around 2.5x by the end of 2017 and 2.1x by 2018. As per Fitch criteria, where financial services (FS) activities are consolidated by the rated entity, Fitch assumes a capital structure for FS operations which is strong enough to indicate that FS activities are unlikely to be a cash drain on industrial/retail operations over the rating horizon. The FS entity's target capital structure takes into account the relative quality of FS assets, its funding and liquidity. Then, the FS entity's debt proxy, or its actual debt (if lower), can be deconsolidated. Considering Fitch's adjustments for captive finance, Liverpool's adjusted leverage as of June 2017 was 1.0x and Fitch expects this ratio to be around this level for the next two years as Suburbia's synergies take place. Fitch believes Liverpool's calculated retail credit metrics will go down below 1.0x in the medium term given its retail expertise and consistent operating and financial track record. Pressures on Mexican Economic Environment During the first semester of 2017, Mexico has presented increasing interest rates and higher inflation rates due to a weak and volatile peso as well as fuel price increases. Fitch expects this economic environment might hit consumption and consumer credit growth in the second half of the year, reversing positive consumption trends presented in the last two and half years. Despite of that, Fitch believes Liverpool is well positioned to face potential headwinds given its strong financial position and operating cash generation. FX Exposure Partially Mitigated Fitch estimates that around 25% of Liverpool's merchandise is exposed to exchange rates. Merchandise exposure is mitigated by re-pricing some articles after inventory restocking; a proportion of exchange rate movements are absorbed by the final customer. The company currently has a total of USD1.1 billion of senior notes due between 2024 and 2026. These USD-denominated notes have hedges in place that cover interest and principal. DERIVATION SUMMARY Liverpool's 'BBB+' ratings are well-positioned relative to its peers. A limited geographic diversification relative to regional and global peers such as Nordstrom and Falabella is offset by its format diversification and solid financial profile, as one of the strongest companies in Fitch's global retailing portfolio in terms of financial profile. Notwithstanding its operations are focused in Mexico, the country still has fundamentals for retailing growth potential. No country ceiling, parent/subsidiary or operating environment aspects impact the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Revenue growth in the mid-single digits during 2018-2020; --Synergies with Suburbia start to take place by 2019; --EBITDA margin around 15.2%; --The company refinances its 2018 maturities with a new issuance; --Average capex around 6.4% of revenue in 2017-2020; --Dividends in line with company policy of 15% of previous year's net income; --No additional acquisitions. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action A successful integration with Suburbia, strong operating cash generation, a consolidated adjusted debt/EBITDAR ratio consistently below 2.5x, a retail-only gross adjusted (for captive finance) leverage consistently below 1.5x, steadily positive FCF throughout the business cycle, and geographic diversification. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action An expansion strategy financed primarily with debt, a sustained consolidated adjusted leverage ratio (gross adjusted debt/EBITDAR) above 3.5x, a retail-only gross adjusted (for captive finance) leverage consistently above 2.5x, sustained negative free cash flow (FCF) below Fitch's expectations, a substantial deterioration in non-performing receivables (more than 90 days), and lower profitability margins. LIQUIDITY The company has good liquidity, backed by its cash on hand and cash flow generation. Liverpool's 2018 maturities are related mainly to a local bond and credit facilities with Credit Suisse and Citibanamex for a total of MXN3.4 billion. The company is planning to issue a local bond for up to MXN5 billion to refinance 2018 maturities. Liverpool has good access to domestic and international capital markets, if needed, which further strengthens its financial flexibility. In addition, the company's large portfolio of owned stores and shopping malls provides solvency through an important base of unencumbered assets. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: El Puerto de Liverpool S.A.B. de C.V. --Long-Term Foreign and Local Currency IDRs at 'BBB+', Stable Outlook; --Long-Term National rating at 'AAA(mex)', Stable Outlook; --Short-Term National rating at 'F1+(mex)'; --USD300 million Senior Notes due 2024 at 'BBB+'; --USD750 million Senior Notes due 2026 at 'BBB+'; --Long-term Certificados Bursatiles issuances (LIVEPOL 08,10,10U, 12-2) at 'AAA(mex)'; --Short-term Certificados Bursatiles program for up to MXN5 billion at 'F1+(mex)'. Fitch has assigned the following rating: El Puerto de Liverpool S.A.B. de C.V. --MXN5 billion pending Long-term Certificados Bursatiles issuance 'AAA(mex)'. Contact: Primary Analyst Maria Pia Medrano Associate Director +52 55 5955 1600 Fitch Mexico S.A. de C.V. Blvd. Manuel Avila Camacho 88, Piso 10 Lomas de Chapultepec, Ciudad de Mexico Secondary Analyst Johnny Da Silva Director +1-212-908-0367 Committee Chairperson Daniel R. Kastholm, CFA Managing Director +1-312-368-2070 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor: --Lease equivalent debt was adjusted with a 6x multiple; --Debt was adjusted to reflect its fair value according to the company's hedge policy; --Debt was adjusted to reflect a proxy of retail debt using a 3x debt to equity multiple for the financial services entity. Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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