Fitch Ratings has assigned a 'BBB-' expected rating to Cencosud S.A.'s (Cencosud) proposed senior unsecured notes. The proceeds from the issuance are expected to be used entirely to refinance debt.
Fitch currently rates Cencosud 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 is Negative.
The ratings reflect Cencosud's solid regional market position, business and geographic diversification, critical size in the food segment relative to its main competitors, important presence in the non-food retail segment, and high level of store ownership. The company's stable margin and high level of unencumbered assets related to its real estate segment, mainly comprising its shopping malls segment, are also viewed positively. Post proposed issuance, the company's liquidity is viewed as healthy, with no material principal debt payments due during the 2015. Factors constraining the ratings include the company's high adjusted leverage and its exposure to Argentina's high sovereign risk.
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, measured as total adjusted gross debt-to-EBITDAR, trending to levels around 3.5x through the divesture of non-core assets and the implementation of several actions oriented to boost business growth and profitability.
KEY RATING DRIVERS
Financial Strategy Implementation Credit Positive:
Fitch views as credit positive the development of the company's financial strategy execution which includes the refinancing of its debt - through the proposed senior notes issuance - that will result in improving Cencosud's debt payment maturity schedule.
The company's financial strategy also includes the completion of the joint venture (JV) credit card transaction signed last June 2014 through which Banco of Nova Scotia (Scotiabank) becomes the holder of a 51% stake in Cencosud's retail financing business in Chile for a 15-year period. Upon execution of the transaction, Cencosud would receive a cash payment of approximately USD1.2 billion that would be used to reduce its debt. Currently, the Canadian regulator has already approved the transaction; the only requirement for the completion of the transaction is approval by the Chilean regulatory authorities, which is expected to occur during the next few months.
Business Deleverage Following JV Completion Crucial:
Fitch expects proceeds from the execution of the JV transaction with Scotiabank will primarily be used to reduce debt levels. On a pro forma basis, excluding operational results related to the Chilean financial retail operations, Cencosud's cash flow generation, measured as EBITDAR, is estimated at CPL835,605 million (USD1.4 billion). Assuming the company uses 100% of the transaction proceeds - estimated at USD1.2 billion - its pro forma adjusted gross and net leverage are estimated at 4.5x and 4.3x, respectively. Excluding real estate operations, the company's pure retail credit profile results in total adjusted gross leverage and net adjusted leverage reaching 3.8x and 3.6x, respectively.
Margins and Capex Levels Key to Business Deleverage in 2015:
On a pro forma basis, the company's net revenues, EBITDA margin; and EBITDAR margin were CPL10,518,209 million, 6.2% and 7.9% during the last 12 month period ended Sept. 30, 2014. Post JV, the supermarkets and shopping malls (real estate operations) segments will become the company's main cash flow generators, representing 64% and 25% of the company's total adjusted EBITDA.
The company's main operational challenge is to grow the business and improve margins while facing a weakening consumer confidence environment driven by slowing economies and inflation pressure in the region. Fitch sees Cencosud's revenue growth rate in the single digits during 2015, while the main opportunities to improve its cash flow generation could come from revamping operational performance in the Brazilian and Colombian supermarkets segments. The company's 2014 capex level is expected to be around USD450 million. While 2015 and 2016 will be announced during the next weeks, Fitch believes annual capex levels significantly above the USD600 million level should result in negative free cash flow (FCF) generation requiring incremental debt levels and limiting business deleverage.
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, consistent improvement in revenue and margin trends; and positive FCF generation - driven by balanced capex levels and lower working capital requirement FCF levels - resulting in material reduction of debt levels with the company's adjusted gross leverage trending to levels below 3.5x coupled with good liquidity reflected in well-spread debt payment schedule and consistently low levels of short-term debt.
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 poor levels of cash flow from operations, high capex or paid dividends not in line with expectations - resulting in negative FCF margin and limited debt level reduction.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 2014);
--'Rating Investment Holding Companies' (Dec. 2013).
Applicable Criteria and Related Research:
Rating Investment Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741159
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978842
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