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Fitch Rates Falabella's Proposed Unsecured Notes 'BBB+(EXP)'
October 17, 2017 / 8:58 PM / a month ago

Fitch Rates Falabella's Proposed Unsecured Notes 'BBB+(EXP)'

(The following statement was released by the rating agency) NEW YORK, October 17 (Fitch) Fitch Ratings has assigned an expected rating of 'BBB+(EXP)' to S.A.C.I. Falabella's proposed issuance of up to USD400 million of unsecured notes. Proceeds from the note issuance would be used to refinance existing debt. The notes would have an intermediate-term maturity and the final amount will depend on market conditions. Fitch currently rates Falabella's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB+' with a Stable Outlook. See the complete list of Falabella's ratings at the bottom of this release. KEY RATING DRIVERS Diversified Business Model: Falabella's ratings reflect the company's multiformat retail business model with store formats that include department and home improvement stores, and real estate and supermarket divisions. The company also operates an integrated financial business that comprises a proprietary credit card business (Promotora CMR Falabella S.A.) and retail banking operations in Chile, Peru, and Colombia. Approximately 26% of its EBITDA comes from international operations, including 20% in Peru. Stable Operating Performance: Falabella has demonstrated stable operating results throughout weak economic times, with steady EBITDA margins of about 12%-13%. Fitch expects single-digit revenue growth in 2017 and a slight increase in EBITDA margin because of the subdued consumer environment, notably in Peru, Colombia, and Brazil. FCF margins are expected to remain negative in the low single digits, which is consistent with the company's growth strategy. The company expects to spend about USD4 billion on capital expenditures during 2017-2020 for organic growth, remodeling of existing stores, logistics and IT. Stable Credit Metrics: We expect Falabella's credit metrics to remain relatively unchanged in 2017. Fitch projects corporate adjusted gross leverage - excluding liabilities related to the banking business - to remain stable at about 4.0x (3.9x as of June 30, 2017), and retail-only adjusted leverage to also remain steady at about 3.0x. Portfolio Credit Quality Remains Stable: CMR continues to show good profitability and performance due to its solid margins and good credit risk management. CMR manages a loan portfolio of about USD2.4 billion. Past-due loans of more than 90 days represented 3% of gross loans as of June 30, 2017. DERIVATION SUMMARY Falabella's 'BBB+' ratings reflect the company's multiformat strategy and its geographical footprint. The company's business profile differentiates from its retail peers due to its presence in several consumer segments (food and non-food retail, department stores, shopping malls and financial services [including banking]). Cencosud S.A. (BBB-) and El Puerto de Liverpool S.A.de C.V. (BBB+) do not enjoy the same degree of business or geographical diversification. As with the other non-food retailers, Falabella is exposed to pure online competition and is challenged by the weak environment in Brazil and economic slowdown in other Latin America countries. Falabella generates about 74% of its EBITDA in Chile and 20% in Peru. The company has limited exposure to Argentina (B) in contrast with Cencosud where Argentina represents about 24% of EBITDA. Falabella's corporate-lease-adjusted leverage at about 3.9x for the LTM ended June 30, 2017, compares favorably with Cencosud's adjusted gross leverage, but Falabella's credit metrics remain weaker than Liverpool's metrics with adjusted gross leverage at about 1.0x. Fitch estimates that Falabella's Retail-adjusted gross leverage was about 2.7x as of June 30, 2017, which is in line with a 'BBB' rating for non-food retailers. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --EBITDA margin stable at around 13%; --Annual FCF margin remains negative in the low single digits; --Capex of about USD4 billion up to 2020; --Corporate-only gross adjusted leverage - excluding banking operations - below 4x. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action Fitch would consider a positive rating action if: --FCF was positive after capex and dividends; --Corporate-only gross adjusted leverage - excluding banking operations - was consistently below 3x; --Retail-only gross adjusted leverage - excluding CMR, banking operation and real estate - was consistently below 2x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action Fitch would consider a negative rating action if the company experiences: --Significant deterioration in the credit quality of the company's credit card and banking businesses; --Corporate-only gross adjusted leverage - excluding banking operations - consistently above 4x; --Retail-only gross adjusted leverage - excluding CMR, banking operation and real estate - consistently above 3.0x-3.5x. LIQUIDITY Falabella's liquidity is adequate due to the company's financial flexibility resulting from its cash from operations, credit card portfolio and ample capital market access. Cash and equivalents of USD267 million and CMR's short-term receivables portfolio of about USD2.4 billion further bolster the company's liquidity; the short-term credit card receivables are highly liquid and financed with short-term debt. Excluding the banking operations, the company faces debt maturities of USD1.1 billion in 2017 and USD0.7 billion in 2018. The short-term debt is mainly related to CMR's debt, bank debt, and CP notes. FULL LIST OF RATINGS Fitch currently rates Falabella as follows: -- Long-Term Local Currency Issuer Default Rating (IDR) at 'BBB+'; -- Long-Term Foreign Currency IDR at 'BBB+'; --USD400 million unsecured bonds due in 2025 at 'BBB+'; --USD500 million unsecured bonds first tranche due in 2023 at 'BBB+'; --USD400 million unsecured bonds at 'BBB+'; --CLP94.5 billion unsecured bonds second tranche due in 2023 at 'BBB+'; --Long-Term National scale rating at 'AA (cl); --Bonds No. 579, series J at 'AA(cl)'; --Bonds No. 395, series K and L at 'AA(cl)'; --Bonds No. 467, series M at 'AA(cl)'; --Bonds No. 578, series O, N and P at 'AA(cl)'; --Bonds No. 846, series R and Q at 'AA(cl)'; --Bonds No. 847, series T and S at 'AA(cl)'; --Bonds No. 395 at 'AA(cl)'; --Bonds No. 467 at 'AA(cl)'; --Bonds No. 468 at 'AA(cl)'; --Bonds No. 846 at 'AA(cl); --Bonds No. 847 at 'AA(cl); --Bonds No. 578 at 'AA(cl)'; --Bonds No. 579 at 'AA(cl)'; --Bonds No. 857 at 'AA(cl); --Bonds No. 858 at 'AA(cl)'; --Bonds No. 859 at 'AA(cl)'; --CP instruments No. 028 at 'AA(cl)'/'N1+(cl)'; --CP instruments No. 035 at 'AA(cl)'/'N1+(cl)'; --CP instruments No. 036 at 'AA(cl)'/'N1+(cl)'; --CP instruments No. 037 at 'AA(cl)'/'N1+(cl)'; --CP instruments No. 038 at 'AA(cl)'/'N1+(cl)'; --National equity rating at Level 1 (cl) (Primera Clase Nivel 1). 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 Analyst +56 24 99 3322 Committee Chairperson Daniel R. Kastholm, CFA Managing Director +1-312-368-2070 Date of Relevant Rating Committee: July 27, 2017 Summary of Financial Statement Adjustments --Fitch adjusts Falabella's accounts using a multiple of 7x for operating leases; --Debt is adjusted by derivatives; --Fitch deconsolidates Falabella's bank accounts. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. 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