July 12, 2017 / 1:41 PM / in 13 days

Fitch Rates Cencosud's Proposed Notes 'BBB-(EXP)'

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(The following statement was released by the rating agency) NEW YORK, July 12 (Fitch) Fitch Ratings has assigned an expected senior unsecured rating of 'BBB-(EXP)' to Cencosud S.A.'s (Cencosud) proposed senior unsecured notes of USD850 million. The unsecured notes are unconditionally guaranteed by the majority-owned Cencosud Retail S.A. Proceeds from the 10-year offering will be used to repay existing bank and bond debt (including the tender offer of the 2021 and 2023 notes), extending the company's debt maturity profile KEY RATING DRIVERS Diversified Business Model: Cencosud's ratings reflect its strong business profile as a geographically diversified, multi-format retailer in South America. It enjoys critical size in the food segment and benefits from a significant presence in the non-food retail segment. The company's stable EBITDA margin and high level of unencumbered assets related to its real estate segment also are viewed positively. Constraining factors include its high exposure to Argentina (26% of adjusted EBITDA) and the poor performance by its operations in Brazil and low margin in Colombia. Expected Deleveraging: Cencosud's adjusted gross leverage, as measured by total adjusted debt/EBITDAR (excluding banking) was 4.6x as of Dec. 31, 2016. Fitch expects the company to reduce its consolidated adjusted gross leverage (excluding banking) towards 4x in 2018 due to increased EBITDA and asset divestments. The company's adjusted debt ratios for the retail and shopping malls business remained broadly stable at about 4x and 5.1x respectively. Fitch anticipates non-core asset disposals that would accelerate deleveraging in 2017. Neutral FCF: Fitch expects Cencosud to generate neutral to slightly negative free cash flow (FCF) due to improved EBITDA (efficiencies) and lower dividends at FYE17. In FYE16, the group generated negative FCF due to lower cash flow from operations and higher dividends. The company paid an extraordinary dividends of about USD220 million in 2016. Fitch assumes capex of about USD500 million in 2017 compared to USD317 million in 2016, as the company is growing organically and investing in IT and omnichannel. Cencosud is contemplating capex of USD2.5 billion between 2017 and 2020. Margin Trend Is Key: Cencosud's main operational challenges are to grow its businesses and improve margins, despite the weak consumer environment in the region. This is a direct result of slow economic growth in Latin America and high inflation in markets such as Argentina. Fitch expects the company to resume single-digit revenue growth due to the gradual improvement of the economic environment in the regions in which the company operates, notably Argentina and Brazil. KEY ASSUMPTIONS --High-single-digit revenue growth in 2017; --EBITDA of 7.3%; --Gross adjusted gross leverage - including retail, shopping malls and banking operations - toward 4x in FYE18; --Fitch does not factor in the potential spin-off of shopping malls; --Capex of USD500 million in 2017. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to a negative rating action include: --Sustained negative FCF; --Group EBITDA margin consistently below 7%; --Lease-adjusted gross leverage - excluding banking operation (Banco Peru) sustained above 4.5x; --Leased-adjusted gross retail leverage (including shopping malls) above 4x. Conversely, Fitch may take a positive rating action if a combination of the following factors takes place: --Consistently positive FCF generation, reflected in FCF margin around 3%-5%; --EBITDA margin consistently above 8%; --Lease adjusted gross leverage - excluding banking (Banco Peru) below 3.5x; --Lease-adjusted gross retail leverage (including shopping malls) below 3x; --Decreased exposure to Argentina's sovereign risk. LIQUIDITY Liquidity is adequate due to the company cash position, its good access to capital markets and manageable debt maturities. Cencosud had cash and cash equivalents, respectively, of about USD522 million and USD553 million in short-term debt. As of March 31, 2017, roughly 67% of consolidated financial debt was denominated in U.S. dollars; 77.4% of total financial debt was covered using cross currency swaps or other exchange rate hedges. Considering the effect of the cross currency swaps, as of March 31, 2017, the company's exposure to the U.S. dollar was 15.3% of the total debt. Fitch currently rates Cencosud S.A. as follows: --Long-Term Foreign Currency Issuer Default Rating (IDR) 'BBB-'; --Long-Term Local Currency IDR 'BBB-'; --USD750 million unsecured notes due in 2021 'BBB-'; --USD1.2 billion unsecured notes due in 2023 'BBB-; --USD650 million unsecured notes due in 2025 'BBB-; --USD350 million unsecured notes due in 2045 'BBB-'. Contact: Primary Analyst Johnny Da Silva Director +1-212-908-0367 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Tatiana Sclabos +56 9 7453 3728 Committee Chairperson Joseph Bormann, CFA Managing Director +1-312-368-3349 Date of Relevant Rating Committee: May 16, 2017 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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