MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to Grupo Elektra, S.A.B. de C.V. (Elektra):
--Foreign and Local Currency Issuer Default Ratings (IDRs) 'BB-';
--Proposed USD350 million senior notes due 2018 'BB-'.
The proposed notes will be unsecured and have the guarantee of all non-regulated subsidiaries: Elektra del Milenio, S.A. de C.V.; Salinas y Rocha, S.A. de C.V.; Comercializadora de Motocicletas de Calidad, S.A. de C.V.; Inmuebles Ardoma, S.A. de C.V., Procuraduria de Cobranza Judicial, S.A. de C.V.; Elektra Guatemala S.A. de C.V.; Servicios de Telecomunicaciones Viva, S.A. de C.V.; and GS Distribucion, S.A. de C.V.
Proceeds from the proposed issuance will be used to refinance existing debt amounting to MXN$3.3 billion (approximately USD$280 million) and general corporate uses, including working capital and Capex.
Fitch currently rates Grupo Elektra as follows:
--Long-term National Scale Rating 'A(mex)';
--Shor-term National Scale Rating 'F2(mex)';
--MXN4,000 million long-term Certificados Bursatiles issuances (ELEKTRA10, ELEKTRA10-2 y ELEKTRA11) 'A(mex)';
--MXN5,000 million short- and long-term Certificados Bursatiles program 'F2(mex)' and 'A(mex)', respectively.
The Rating Outlook is Stable.
Elektra's ratings reflect its operation's geographical diversification, its market position both in the retail and finance business,the latter including Banco Azteca (BAZ,; rated 'A(mex)' by Fitch), as well as the strong linkage between both operations. On the retail side, the ratings are supported by its market share, being one of the leading chains in its sector, with considerable brand equity (Elektra), supported by and extensive retail network across Mexico and, increasingly, in countries such as Guatemala, Honduras, Panama, El Salvador, Peru, Brazil and Argentina. Grupo Elektra's retail operations are strongly linked to those of Banco Azteca, a result of the retail business strategy of selling on credit. BAZ's credit quality is supported by its management expertise in consumer credit, asset quality, strong liquidity and the credit risk of its portfolio.
Fitch believes that the retail operation, by focusing on consolidating operations under the Elektra banner over the last few quarters, in introducing new products (motorcycles), and in diversifying geographically across parts of Latin America, tempers its business risk (operations in Mexico, both retail and financial, generate about 87% of the Group's consolidated revenues). The company competes in a highly competitive market, in which other participants have increased their footprint.
A better business climate, the discontinuation of low profitability product lines, and changes in marketing strategies, have resulted in revenues increasing 13.3% in 2010, above 2009 levels. Operating margins climbed to 15.0%, above the 11.2% registered the previous year. This is in contrast with the stable sales and decreasing operating margins between 2007 and 2009.
BAZ's ratings reflect its broad experience and competitive advantage in consumer finance, the recent recovery in asset quality and profitability ratios towards historical levels (trends that Fitch expects to further consolidate in the near future), as well as an ample, stable and diversified base of core customer deposits, which allows the bank to maintain robust liquidity. The ratings also consider the strong growth of its loan portfolio and management's challenge to sustain recent improvement in its financial performance amid an increasingly challenging competitive environment, given the high relative level of operating costs associated with its business model.
Credit risk is BAZ's major exposure. While commercial loans have grown considerably in recent years, the portfolio is still mainly composed of consumer loans (65.6% of total portfolio). Adverse economic conditions affected its borrowers' payment capacity, deteriorating its asset quality indicators; however, enhanced collection efforts and sizable charge-offs allowed the bank to strengthen its past due loans and coverage ratios (first quarter 2011 (1Q'11): 3.7% and 146.4%, respectively). Commercial loans (31.8% of total portfolio) are highly concentrated and the 20 largest exposures accounted for 1.8 times (x) equity. In Fitch's opinion, BAZ has a low risk appetite in its securities portfolio and at 1Q'11 this was composed of government bonds (66.2%), bank debt (28.2%), with the balance made of investments in mutual funds and securities issued by state-owned companies.
BAZ's funding mix and costs remain among its main strengths. Current customer deposits (96% of total deposits) are highly diversified and have demonstrated stability through different phases of the economic cycle. In Fitch's opinion, the high portion of liquid assets in the securities portfolio and the stability of deposits are critical factors that significantly mitigate the bank's liquidity risk.
For the last 12 months (LTM) ended June 30, 2011 and in consolidated terms, debt to EBITDA (including bank deposits), has kept constant at 9.9x compared to 10.0x over the same period the previous year. Nonetheless, with regard to the retail operation's leverage (which excludes BAZ and other financial businesses), Fitch estimates that debt to EBITDA (LTM June 2011) is above 2.0x, slightly higher than the same period the previous year. Fitch considers that this ratio could be around 2.5x at the end of 2011, as a result of additional debt required to finance capex and including the proposed issuance.
As of June 2011, the retail business' total debt (excluding BAZ and other financial businesses) amounted to MXN$11.1 billion, 48.5% above the same period in 2010. This debt is made up of bank loans, debt issuances and structured issuances. Remaining amortizations for 2011 total MXN$3.9 billion. Elektra has paid annual dividends of about MXN$350 million and Fitch expects that this amount will increase moderately. For 2011, total capex will be about MXN$2 billion, mainly to be used for branch remodeling in Mexico and point of sales growth.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
- 'National Ratings Criteria'. Jan. 19, 2011;
- 'Corporate Rating Methodology'. Aug. 16, 2010;
- 'Short Term Ratings for Corporate Finance'. Nov. 2, 2010;
- 'Parent and Subsidiary Rating Linkage'. Jul. 14, 2010;
- 'Evaluating Corporate Governance'. Dec. 16, 2010;
- 'Operating Leases: Updated Implications for Lessees' Credit'. Aug. 12, 2009.
Applicable Criteria and Related Research:
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Corporate Rating Methodology - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Short-Term Ratings Criteria for Corporate Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405
Operating Leases: Updated Implications for Lessees' Credit
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462222
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