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Fitch Affirms Regal Forest Holding's IDRs at 'BB-'; Outlook Stable
December 23, 2016 / 5:52 PM / a year ago

Fitch Affirms Regal Forest Holding's IDRs at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) MEXICO CITY, December 23 (Fitch) Fitch Ratings has affirmed Regal Forest Holding Co. Ltd's (Grupo Unicomer) ratings as follows: --Long-Term Local Currency Issuer Default Rating (IDR) at 'BB-'; --Long-Term Foreign Currency IDR at 'BB-'. The Rating Outlook is Stable. The ratings reflect the company's leading business position in most of the countries where it operates and the solid financial position of its main shareholders. The ratings incorporate Grupo Unicomer's geographic and format diversification that have contributed to positive consolidated cash flows from operations (CFFO) throughout economic cycles. The company has been reporting stable operational results based on a business model that targets low-income to middle-income segments. Grupo Unicomer's ratings are limited by its operating environment considering the countries in which it operates, with low sovereign ratings and its growth strategy through acquisitions, funded mainly with debt, which in turn has prevented it from reducing consolidated leverage. KEY RATING DRIVERS Operating Environment and Format Diversification: Grupo Unicomer has commercial operations in 24 countries across Central America, South America and the Caribbean. The company has a track record of more than 15 years in consumer durables sales, which has enabled it to develop long-term relationships with suppliers and to have competitive advantages in terms of location of its stores within small countries where prime retailing points of sale are very limited. The company maintains a leading business position in the selling of consumer durables goods, supported by its proprietary financing services and economies of scale in terms of purchasing power and logistics. Geographic Diversification: Geographic diversification allows Grupo Unicomer to have a broad revenue base supported by different economic dynamics and somehow mitigates the company's country risk of most of its markets, within the 'B' rating category. Costa Rica, Jamaica, Trinidad and Tobago, and Ecuador are among the most important cash flow contributors. In addition, the company has several store formats and brands across their operations. Positive Cash Flow from Operations: For the LTM ended September 2016, the company generated USD70.1 million of CFFO. Fitch expects the company's CFFO to remain positive during 2017-2020. Grupo Unicomer is executing an investment plan for the next four years in order to keep its business position and recover the profitability margins it had in the past (around 14% of EBITDA margin). Capex levels should be around USD44.3 million per year during the medium term excluding potential acquisitions. In 2015-2016, the company acquired two retail chains, one in Paraguay and the other in the Caribbean countries of Bonaire, Curacao and St. Maarten. Historically, Grupo Unicomer has consistently maintained positive CFFO throughout economic cycles. The company has had the flexibility to adjust its operations during economic downturns by restricting credit origination, reducing bank debt and improving its product mix in order to protect its operating cash flows. Grupo Unicomer's CFFO has been robust enough to fund capex and dividend payments during the years. However, new acquisitions have been financed mostly with debt. Ambitious Growth Funded Mainly with Debt: Historically, Grupo Unicomer has expanded its operations through a combination of organic and inorganic growth. Since its inception, the company has done important acquisitions that increased its size and coverage. While organic growth was primarily funded with internal operating cash flows, acquisitions were funded mainly with debt. As of September 2016, lease adjusted debt to EBITDAR was 4.7x, an increase from 4.3x registered a year ago, mainly due to the debt related to the funding of the ElectroFacil and Omni acquisitions in December 2015 and April 2016, respectively. Fitch expects the company to reduce this ratio to 4.2x-4.3x by the end of March 2017. Financial Spread Offsets Moderate Level of Overdue Accounts: The company's consumer finance strategy includes sufficient financial spreads to cover credit risks associated with the portfolio. During the last five years, the portfolio yield after deducting uncollectable expenses and write-offs has been nearly 40% on average. While more than half of retail sales are on credit originated by Grupo Unicomer, the company has started offering cash loans to their customers, which in Fitch's view are riskier. As of June 30, 2016, Grupo Unicomer's portfolio had an average of 7.4% of non-performing loans (past due accounts for 90 days or more). This compares negatively to 6.9% in March 2016, due to a reduction in the portfolio as well as the economic and political conditions in Central America, Trinidad and Tobago and Ecuador. As of June 2016, the company has reserves equivalent to 96% of those non-performing loans. The level of overdue accounts is partially offset by the company's efficient collection program and portfolio yield. Shareholders' Sound Financial Position: The ratings consider the sound financial position of Grupo Unicomer's shareholders Milady Group (Milady 50%) and El Puerto de Liverpool, S.A.B. de C.V. (Liverpool 50%), with a proven track record in retail since 1847. Milady's operations include real estate developments, department store chains, all Inditex's franchises in Central America, and a vertically integrated textile manufacturing and wholesaling business. Liverpool ('BBB+'/Outlook Stable), a department store with 118 units and 25 shopping malls in Mexico, had USD5.4 billion in total revenues in the LTM ended September 2016 with 16% of EBITDA margin. Liverpool's total adjusted debt/EBITDAR was 1.9x for the same period. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Grupo Unicomer include: --Revenue growth of 4.9% on average for 2017-2020; --EBITDA margin of 12.3% for year-end 2017 and close to 13% going forward; --Total Adjusted Debt to EBITDAR of 3.5-4.5x in the medium term; --Dividend payments equivalent to 25% of net income for 2017-2020; --Stable portfolio credit quality; --Potential inorganic growth in 2017 and 2018. RATING SENSITIVITIES Future developments that may individually or collectively lead to a negative rating action include: deterioration in overdue accounts from the consumer finance business, significant reduction in cash flow generation, further debt-financed acquisition activity resulting in an adjusted debt to EBITDAR ratio above 5x and/or deterioration of liquidity compared to short-term debt. Future developments that may individually or collectively lead to a positive rating action include: diversification of operating subsidiaries in countries with higher sovereign risk, total adjusted leverage below 3.5x on a sustained basis, simplification of the company's debt structure, and significant reduction on its current maturities that result in a consistent ratio of cash plus CFFO-to-short-term debt of 1.0x. LIQUIDITY Liquidity is adequate for the rating category. The company's main source of liquidity is internal cash generation consisting of positive CFFO. Cash and equivalents of USD54 million and a short-term net receivables portfolio of USD595 million further support the company's liquidity. The company's liquidity ratio, measured as FCF plus cash and marketable securities over debt service coverage, was 0.1x as of Sept. 30, 2016; including short-term account receivables in the calculation the ratio increases to 1.7x. As of Sept. 30, 2016, Grupo Unicomer reported total adjusted debt of USD1.2 billion, of which USD305 million was classified as short-term. This level of current debt compares with USD54 million of cash and marketable securities and USD118 million of uncommitted undrawn revolving credit facilities. The company benefits from sales coming from the October-December quarter (approximately 34% of total revenues) and from potential liquidity of its USD595 million of short term account receivables from the consumer finance unit. Contact: Primary Analyst Maria Pia Medrano Associate Director +52 55 5955 1600 Blvd. Manuel Avila Camacho 88, Piso 10. Col. Lomas de Chapultepec, Mexico City Secondary Analyst Johnny Da Silva Director +1 212 908 0367 Committee Chairperson Alberto Moreno Senior Director +52 81 8399 9100 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Date of Relevant Rating Committee: Dec. 22, 2016. Additional information is available on www.fitchratings.com. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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