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Fitch Downgrades Famsa's IDRs to 'B-'; Outlook Stable
March 3, 2017 / 9:03 PM / 9 months ago

Fitch Downgrades Famsa's IDRs to 'B-'; Outlook Stable

(The following statement was released by the rating agency) MEXICO CITY, March 03 (Fitch) Fitch Ratings has downgraded Grupo Famsa S.A.B. de C.V.'s (Famsa) Local and Foreign Currency Long-Term Issuer Default Rating (IDR) to 'B-' from 'B' as well as the long-term National Scale rating to 'BB(mex)' from 'BBB-(mex)'. The Rating Outlook is Stable. In addition, Fitch has downgraded Famsa's National short-term rating to 'B(mex)' from 'F3(mex)'. A full list of rating actions follows at the end of this press release. The rating downgrades reflect the company's high leverage, constant capital requirements from its subsidiary Banco Ahorro Famsa (BAF), the deterioration of Famsa's U.S. operations and the expected economic slowdown in Mexico, which will pressure the company's cash flow generation in 2017. Famsa's expected improvements in operating margins will not be sufficient to offset the company's current challenges. The rating actions also take into account a material delay in receiving the full amount of proceeds from the guarantee (collection rights) Famsa has with its main shareholder Humberto Garza Gonzalez. The company announced that by April 2017 it will receive MXN1.3 billion of the MXN5.1 billion shareholder guarantee due in June 2017. Additional payments of a total of MXN2 billion will be received during 2018 and 2019. The remaining MXN1.8 billion will be collected in monthly payments equivalent to Famsa's lease payments to related parties, estimated by Fitch at MXN70 million per year. The Stable Outlook reflects Fitch's expectation that the company will receive a MXN1.3 billion payment from Mr. Garza in April 2017 to pay short-term debt and that Famsa's initiatives to refinance a part of its remaining short-term debt will be successful. The Outlook also considers Fitch's expectation that Famsa will receive two additional payments of MXN1 billion each from Mr. Garza during 2018 and 2019, which will be directed toward repaying debt. KEY RATING DRIVERS The rating continues to reflect Famsa's market position within the Mexican retail sector, its geographic and product diversification, stable operating cash flow generation by the Mexican retail operation, as well as an expectation of a gradual improvement in leverage. Good Performance in Mexican Retail Sales: Following the consumption trend in the country for the last two years, Famsa presented a consolidated revenue increase of 10.1% compared to 2015. For 2017, Famsa's main challenge is to retain market share and still be profitable amid the economic uncertainty in Mexico and in a market where larger retail chains, such as Coppel and Elektra, also target the low-income segment of the population. Banco Famsa Undergoing Operational Consolidation: Famsa's financial division, Banco Famsa (BAF), has good brand equity and a good competitive position in consumer finance, mainly in northeastern Mexico. Its financial performance is constrained by its high funding costs which limit the bank's profitability, along with still high loan-impairment charges. During the period of 2014 to 2016, Famsa made total capital increases of MXN800 million to BAF. BAF continues to operate with a diversified and growing base of customer deposits. BAF also shows organic growth in its loan portfolio, although customers' sensitivity to a weak economic environment continues to be a limiting factor. U.S. Operations Under Pressure: During 2016, U.S. stores' same store sales decreased 11.3% compared to 2015 despite the company's expectations for sales to remain positive. Fitch believes 2017 will be a challenging year for Famsa's U.S. operations given consumer trends in the country and the recent changes in migration policy that will negatively affect Famsa's target market of U.S. Hispanic customers. Fiscal year end (FYE) 2016 revenues for the U.S. operations were MXN2.3 billion, an increase in pesos compared to MXN2 billion in 2015. Most of the increase is related to the peso devaluation. High Leverage: Weaker expected results in Famsa's U.S. operations coupled with debt increases have led to sustained levels of high leverage. The company ended 2016 with a lease adjusted debt (excluding banking deposits) to EBITDAR ratio of 5.9x and Fitch estimates 2017's adjusted leverage will remain at similar levels. As of Dec. 2016, Famsa's total debt was MXN10 billion, with 56% from the USD250 million senior unsecured notes due in 2020. Profitability and Liquidity Improvement Initiatives Underway: The company has been taking some actions to improve profitability and liquidity, such as redesigning the personnel structure, reducing costs and expenses, executing maintenance-only capex and carrying out selective store closings. Famsa is also planning to reduce its short-term FX exposure by hedging its USD250 million senior notes coupons for 2017 and 2018. During 2016, Famsa increased its payroll credit origination to strengthen its credit portfolio. The results from this initiative were not realized in 2016 but could affect 2017 results positively relative to Fitch's expectations. RATING SENSITIVITIES Future developments that may individually or collectively lead to a negative rating action include: failure to receive the MXN1.3 billion from Mr. Garza scheduled by April 2017, failure to receive additional significant payments from Mr. Garza's guarantee in the coming years, sustained weaknesses in internal operating controls, deterioration in BAF's creditworthiness beyond FAMSA's ability to lend support, consolidated gross leverage (excluding bank deposits) consistently above 5.5x, lower than expected EBITDA generation by FAMSA USA, as well as further deterioration in the quality of the loan portfolio. No positive rating actions are currently contemplated over the near term. LIQUIDITY Liquidity is tight: For year-end 2016, Famsa's short-term debt (excluding banking deposits) was MXN4 billion, with non-restricted cash holdings of about MXN1.5 billion (most of it at BAF), so some refinancing risk will likely persist. Short-term debt for Famsa is mostly made up of short-term Cebures issuances, which the company has been able to roll over, and bank loans with several institutions. The company does not face major debt amortizations until 2020. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: --Consumption decrease during 2017 due to economic uncertainty; --Consolidated revenues grow on average 4.6% annually during 2018-2020; --Average EBITDA margin of 9.1% during 2017-2020; --EBITDA from the U.S. division is positive during 2017-2020; --Average funds from operations (FFO) of MXN5.4 billion per year for 2017-2020; --Consolidated debt (excluding bank deposits) of around MXN8 billion in 2017-2018; --Average capex of MXN227 million during 2017-2020; --No dividends payment for 2017-2020; --Famsa receives the MXN1.3 billion from Mr. Garza's guarantee before June 2017 to repay short-term debt; --Famsa receives additional payments from Mr. Garza's guarantee in 2018-2019 to reduce debt; --If necessary, FAMSA will continue to support Banco Famsa. FULL LIST OF RATING ACTIONS Fitch has downgraded the following ratings: --Foreign Currency Long-Term IDR to 'B-' from 'B'; --Local Currency Long-Term IDR to 'B-' from 'B'; --Long-term National scale rating to 'BB(mex)' from 'BBB-(mex)'; --Short-term National scale rating to 'B(mex)' from 'F3(mex)'; --USD250 million senior unsecured notes due in 2020 to 'B-/RR4' from 'B/RR4'; --MXN1 billion Certificados Bursatiles issuance due 2017 to 'BB(mex)' from 'BBB-(mex)'. --MXN500 million short-term Certificados Bursatiles program to 'B(mex) from 'F3(mex)'; --MXN500 million short-term Certificados Bursatiles program to 'B(mex) from 'F3(mex)'. The Rating Outlook is Stable. The 'RR4' rating reflects average recovery prospects in case of default of between 30% and 50% of principal. Contact: Primary Analyst Maria Pia Medrano Associate Director +52 55 5955 1600 Ext. 2115 Fitch Mexico S.A. de C.V. Blvd. Manuel Avila Camacho 88, Piso 10 Lomas de Chapultepec, Ciudad de Mexico. Secondary Analyst Johnny DaSilva Director +1-212-612-0367 Committee Chairperson Daniel Kastholm Managing Director +1-312-368-2070 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Date of Relevant Rating Committee: March 2, 2017. Additional information is available on www.fitchratings.com Applicable Criteria Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here National Scale Ratings Criteria (pub. 30 Oct 2013) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020051 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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