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Fitch Rates Liverpool Proposed Sr. Notes 'BBB+(exp)'
September 18, 2014 / 6:11 PM / 3 years ago

Fitch Rates Liverpool Proposed Sr. Notes 'BBB+(exp)'

(The following statement was released by the rating agency) MONTERREY, September 18 (Fitch) Fitch Ratings has assigned the following ratings to El Puerto de Liverpool, S.A.B. de C.V. (Liverpool): --Foreign and Local Currency Issuer Default Rating (IDR) 'BBB+'; --Proposed up to USD500 million senior unsecured notes due 2024 rated 'BBB+(exp)'. The Rating Outlook is Stable. KEY RATING DRIVERS: The ratings reflect the company's leading business position in Mexico, where the company has a strong presence with 102 stores and 22 shopping malls, solid market participation, geographic diversification within Mexico, and high proportion of owned property. The ratings also consider the quality of its loan portfolio and solid financial position. Supporting the ratings is the company's positive cash generation from operations throughout the business cycle. The ratings also incorporate the higher level of competition from other department store chains and a more aggressive incursion of supermarkets, as well as negative free cash flow (FCF) in recent years. The Stable Outlook incorporates Fitch's view that Liverpool will execute its expansion strategy while maintaining its credit profile over the medium term. Adjusted debt-to-EBITDAR is expected to remain around 1.5x in the following years, in addition to a stable portfolio credit quality. Stable Leverage Levels: Liverpool's gross adjusted leverage measured as total adjusted debt/EBITDAR (EBITDA plus rental expenses) for the last 12 months (LTM) ended June 30, 2014 remains low at 1.3x; this ratio was 1.4x and 1.3x at the end of 2013 and 2012, respectively. During the LTM ended June 2014, the company generated EBITDAR of MXN13 billion compared to MXN12.5 billion in the same period in 2013. Fitch estimates that during 2014 the company could increase its total debt by approximately MXN1.5 billion, and in the next few years by around MXN2 billion, due to both store expansion and the growth of its loan portfolio. This portfolio will be funded through a combination of internally generated cash flow and additional debt. Despite this expected strong organic growth, Fitch believes during 2014-2016 the company's leverage levels will remain around 1.5x. Commitment to Financial Profile: Liverpool management remains committed to maintaining manageable debt levels. At June 30, 2014, interest-bearing liabilities, including Sale and Lease Back, were MXN13.5 billion, 66% of which are long term. At the end of the first half of 2014 (1H'14) the balance of cash and cash equivalents was MXN554 million. The company's next debt maturity is MXN4 billion in December 2014, corresponding to the issuance of certificados bursatiles issued in 2007, which are expected to be refinanced with the proposed senior unsecured issuance. Management maintains the initiative to finance growth through cash flow generation and external financing. Consistent Growth, Strong Branding: Liverpool is the leader in the middle-, middle-high and high-income segment of department stores in Mexico, with a calculated market share at 1H'14 of 63.9%, when compared to the retail revenues reported by department chains Palacio de Hierro, and Sears Mexico. At June 30, 2014, the company operated 102 stores, 74 under the name of Liverpool, 23 Fabricas de Francia and five stores in the format Liverpool Duty-Free, of which 86.5% are owned by Liverpool. Its stores are located in 57 cities throughout Mexico. Liverpool also has 22 shopping malls operating in 16 cities and owns a 50% stake in Regal Forest Holding Co., which has 13 different store brands that sell consumer durable products in Central and South America and the Caribbean, which is recognized under the accounting equity method. Industry Outperformer: Liverpool's Same Store Sales (SSS) was 6.5% in 2013, above the average of the Asociacion Nacional de Tiendas de Autoservicio y Departamentales, A.C. (ANTAD) department store's segment of 4.7%. In 1H'14, Liverpool SSS growth was 4.8%, compared the average of ANTAD department store's segment of 2.9%. This positive performance differential was achieved for the ninth time in the last 12 years. Total sales (TS) including interest income, rents and services, at Dec. 31, 2013, increased 11.9% compared to the same period of the previous year. Slightly lower EBITDA margins resulted in EBITDA growth of 6.5% in the same period. In 1H'14, TS grew 10.7% compared with the same period of 2013. Fitch expects Liverpool TS growth of around 9% in 2014 and SSS around 4.5%. Healthy Credit Portfolio: Levels of non-performing loans (NPLs), due 90 days or more, have remained below those recorded in 2008 of 5.2%. As of June 2014, the level of NPLs was 3.1%, in line with previous expectations. Fitch estimates that annual levels of NPLs will remain relatively stable in the range of 3% to 4%. Liverpool's loan portfolio as of June 30, 2014 was MXN28 billion; bad debt reserves were 2.4x the amount of NPLs aged 90 days or more. Total performing loans (MXN24.2 billion) covers Liverpool's total debt by 1.8x. In addition, the high proportion of owned property (86.5% of the selling area of its 102 stores) provides the company high solvency ratios. Negative FCF Trend: The company has recorded negative FCF during the past 3.5 years, due to the deployment of its expansion strategy. Liverpool generated negative FCF of approximately MXN1.7 billion, MXN3.5 billion, MXN3.8 billion and MXN2 billion at LTM ended in June 2014, and in fiscal years ended December 2013, 2012 and 2011, respectively, mainly due to high capex related to its expansion plan. Fitch's calculation of FCF considers cash flow from operations less net paid interest, capital expenditures and distributed dividends. FCF is expected to remain negative during 2014-2016. The company invested MXN6.4 billion during the LTM ended June 2014, MXN6.5 billion in 2013, MXN8.6 billion in 2012 and MXN5.5 billion in 2011. However, Fitch views positively the company's ability to generate positive cash from operations (CFO) through economic cycles. Liverpool generated positive CFO of MXN6.7 billion at LTM June 2014, MXN5.6 billion in 2013 and 2012, and MXN4.2 billion in 2011. FCF in 2013 includes payment of an extraordinary dividend. Fitch expects Liverpool to resume its annual dividend payments in 2015 at approximately MXN1 billion-1.5 billion. RATING SENSITIVITIES: The following are factors that individually, or collectively, could result in a positive rating action: --Leverage ratios lower than Fitch?s expectations, in conjunction with consistently positive FCF throughout the business cycle. The following are factors that individually, or collectively, could result in a negative rating action on Liverpool?s ratings: --If the expansion strategy of the company is carried out intensively with debt resulting in leverage ratios above Fitch's expectations and/or negative FCF above MXN4 billion; --Levels of nonperforming accounts receivables increase substantially higher than levels presented in the last three years; --Substantial reductions in margins that lead to weak interest coverage; --Large debt-financed acquisitions. Fitch currently rates Liverpool as follows: --Long-term National Scale rating 'AAA(mex)'; --Short-term National Scale rating 'F1+(mex)'; --Long-term Certificados Bursatiles issuances (LIVEPOL 07,08,10,10U,12,12-2) 'AAA(mex)'; --Short-term portion of Certificados Bursatiles program for up to MXN5 billion 'F1+(mex)'. Contact: Primary Analyst Indalecio Riojas Associate Director Fitch Mexico, S.A. de C.V. Prol. Alfonso Reyes 2612, Monterrey, N.L. Secondary Analyst Miguel Guzman Associate Director Committee Chairperson Sergio Rodriguez, CFA Senior Director Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available at ''. Applicable Criteria and Related Research: --'Corporate Rating Methodology', May. 28, 2014. --'National Scale Rating Criteria', Oct. 31, 2013. Applicable Criteria and Related Research: National Scale Ratings Criteria here 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'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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