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Fitch Affirms Office Depot de Mexico's IDRs at 'BB+; Outlook Revised to Stable
December 23, 2016 / 5:40 PM / 9 months ago

Fitch Affirms Office Depot de Mexico's IDRs at 'BB+; Outlook Revised to Stable

(The following statement was released by the rating agency) MEXICO CITY, December 23 (Fitch) Fitch Ratings has affirmed Office Depot de Mexico S.A. de C.V.'s (ODM) Long-Term Local Currency (LC) and Foreign Currency (FC) Issuer Default Ratings (IDRs) at 'BB+'. The Rating Outlook has been revised to Stable from Negative. A full list of rating actions follows at the end of this press release. The revision of the Rating Outlook to Stable reflects the important reduction of the company's debt as well as the mitigation of the foreign exchange risk related to its debt after the USD200 million cash capital increase from its shareholder Grupo Gigante (GG) and the make-whole call of the USD350 million senior notes on Dec. 19, 2016. On Dec. 19, ODM prepaid its USD-denominated debt with a combination of Mexican peso-denominated debt, cash and a capital increase from GG. On a pro forma basis, ODM will reduce its debt to nearly MXN3 billion from the MXN6.8 billion in September 2016, for an adjusted debt to EBITDAR ratio of 2.7x from the 4.2x on Sept. 30, 2016. ODM's credit quality reflects its leadership position in the office products super-store segment, diversified geographical footprint and consistent cash flow generation. The ratings also consider ODM's sound liquidity position and the expectation that the company will successfully integrate and align the recent acquisitions into its operations and financial results. KEY RATING DRIVERS Strong Business Profile ODM's operating profile is supported by its national retail presence in Mexico, operations in Central and South America, mix of large corporate customers, small businesses and consumers. It has a leading position among Mexican office supply super stores and non-Mexican sales represent about 27.8% of total revenues. In addition, its wide distribution network, preponderance of cash sales and mostly local sourcing of inventory further supports ODM's business profile. Stable Cash Flow Generation The company has shown consistent growth over the past 13 years, with solid EBITDA generation even during economic downturns. Same store sales (SSS) recovered during 2015 (6.3%) and the first nine months of 2016 (8.1%) due to improved consumer confidence, low inflation rates and increasing real wages, while total sales increased by 29.5% and 21.5%, respectively, due to the consolidation of Grupo Prisa (Prisa) and RadioShack de Mexico (RSM). During the LTM ended September 2016, EBITDA margins declined by nearly 220 basis points (bps) to 8.2% compared to full-year 2014 (10.4%), a result of the acquired companies' lower margins. Fitch expects ODM's EBITDA margin to be around 9% in the medium term. Important Reduction in Debt ODM's leverage ratios should improve after the USD350 million notes prepayment. The company refinanced part of those bonds with a MXN3 billion Mexican peso-denominated facility with Banco de Comercio Exterior (Bancomext). The new debt has a 10-year term and 2-year grace period, which should allow the company to focus on the potential synergies of Prisa and RSM. On a pro forma basis, adjusted Debt to EBITDAR should be around 2.7x from the 4.2x in September 2016. Fitch expects ODM's leverage to improve as synergies and margin improvements from the recent acquisitions materialize. Growth Through Targeted Acquisitions During 2015, ODM acquired Grupo Prisa (Prisa), a Chilean office supply company, as well as RadioShack de Mexico (RSM). These acquisitions have increased revenues by about 30%. Fitch believes Prisa adds geographical diversification to ODM, while RSM could see improved margins and market share under ODM's stewardship. The Mexican office supply and small electronics retail industry is very fragmented, with the potential for consolidation by big players such as ODM. Going forward, ODM will also pursue a robust growth strategy, with an estimated 40 store openings per year on average. Fitch expects these openings and any upcoming acquisitions to be funded with internally generated cash flow, as the company has done in the past. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: --Average revenue growth of 7.5% per year during 2016 - 2019; --EBITDA margins close to 8.8% on average during 2016 - 2019; --Prepayment of the USD350 million senior notes with a USD200 million capital increase and a new credit facility for MXN3 billion; --CFO generation above MXN1 billion per year; --Average annual capex of MXN798 million during 2016 - 2019; --Cash dividend payments of 50% of net income. RATING SENSITIVITIES Factors that could be detrimental to credit quality include: --EBITDA margin trends below Fitch's expectations; --Sustained negative SSS over time; --Debt-financed acquisitions; --Further devaluation of the Mexican peso vs. the U.S. dollar; --Other factors that drive adjusted debt to EBITDAR above 3.2x; debt to EBITDA above 2.5x and FFO adjusted leverage (Debt adjusted by leases / Funds from Operations) above 4.5x within the next 12 - 24 months. Factors that could improve creditworthiness include stronger-than-expected operating results, an adjusted leverage ratio at or under 3.2x and continued positive SSS while maintaining its leadership in the office supply market. LIQUIDITY ODM's liquidity position is sound. As of September 2016, ODM had a cash and marketable securities balance of MXN1 billion and short-term debt of MXN21 million (incurred by Prisa before the acquisition). No material debt maturities are due until 2019 when the new credit facility's amortization begins. Free cash flow (FCF) has been positive over the past five years, and Fitch expects it to remain positive going forward. Estimated capex in the medium term is around MXN800 million per year. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Office Depot de Mexico S.A. de C.V. --Long-Term Foreign Currency IDR at 'BB+'; --Long-Term Local Currency IDR at 'BB+'. The Rating Outlook is Stable. 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, Mexico City Secondary Analyst Johnny DaSilva Director +1-212-612-0367 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. 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