NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB-' Issuer Default Rating (IDR) to Intercorp Retail Trust (IRT) and a 'BB-(exp)' rating to the company's USD300 million proposed senior notes. IRT is a trust formed under the laws of the Cayman Islands solely to issue the notes. Fitch has also assigned 'BB-' local and foreign currency IDRs to Intercorp Retail Inc. (formerly known as IFH-R Holding Corp.). The Rating Outlook is Stable.
The proposed issuance will be unconditionally and irrevocably, jointly and severally, guaranteed by Intercorp Retail Inc. (Intercorp Retail) and its subsidiaries: Supermercados Peruanos Holding Corp., IFH Pharma Corp., Coeptum Holding Ltd., Zermatt Pharmaceulticals, Pharmacies Europeennes Holding, Chammar Trading, IFH Retail Corp., HPSA Corp, Lince Global Opportunities, Eckerd Peru S.A. (Inkafarma), Boticas del Oriente S.A.C., Eckerd Amazonia S.A.C., Inmobiliaria Espiritu Santo S.A.C.
The final rating is contingent upon the receipt of final documents conforming to information already received.
Intercorp Retail's ratings reflect its diversified business model, continued growing operations, and solid market position in Peru's supermarket and pharmacy retail segments. Factors that constrain the rating are the company's high leverage and negative free cash flow generation due to significant capex plan and recent strategic acquisition. The ratings also consider the company's limited geographic position, as all of its retail operations are in Peru, and the increasing competition in Peru's highly concentrated formal retail sector, as key competitors are implementing significant capex plans to consolidate their market positions.
Intercorp Retail has a solid market position in Peru's growing and under penetrated retail sector through Supermercados Peruanos S.A. (SPSA), the second largest supermarket chain in Peru with 35% market share, Inkafarma, the leader pharmaceutical retail chain in Peru with a 47% market share, and expanding operations in the department store, credit card operations, and home improvement segments through its operating companies Tiendas Peruanas S.A. (TPSA), Financiera Uno S.A. (FUSA), and Homecenter Peruanos S.A. (HCPSA).
The Stable Outlook incorporates the view that the company's credit profile will remain stable during the next year. The company's consolidated adjusted gross leverage, measured by total adjusted debt to EBITDAR, is expected to remain stable in the range of 5 times (x) to 5.5x range through the end of 2012.
Strong Brand and Solid Market Position in Peru's Supermarket and Pharmacy Retail Segments:
Intercorp Retail's ratings are supported by the strength of the credit quality, strong brand recognition, and consolidated market position of its most important indirect operating subsidiaries, SPSA and Inkafarma, which represent approximately 64% and 31% of Intercorp Retail's consolidated revenues during LTM June 2011. As of June 30, 2011, The company held 99.6% and 74.2% of the total outstanding economic interest in SPSA and Inkafarma, respectively.
SPSA is the second largest supermarket chain in Peru, with an estimated 35% market share. As of June 30, 2011, SPSA operated 67 stores throughout the country with a total sales area of 185,958 square meters, with revenues, EBITDAR, and EBITDAR margin levels of S/.2,599 million, S/.227 million, and 8.7%, respectively. SPSA's gross adjusted leverage was 3.7x and 3.0 during the LTM ended June 30, 2011 and December 2010, respectively.
Inkafarma is the leading pharmaceutical retailer in Peru, with an estimated market share of 46.6% market. As of June 30, 2011, Inkafarma operated 409 stores throughout the country and had revenues, EBITDAR, and EBITDAR margin levels of S/.1,256 million, S/.113 million, and 9%, respectively. Inkafarma's gross adjusted leverage was 2.1x and 1.8 during for the LTM ended June 30, 2011 and during 2010, respectively.
Intercorp Retail's ratings also factor in an expected improvement between 2011 and 2013 in the credit profiles of its other four indirect operating subsidiaries Tiendas Peruanas S.A. (TPSA), Financiera Uno, Homecenter Peruanos S.A. (HCPSA) and Milenia with operations in the department store, credit card operations, home improvement, and real estate segments, respectively.
Consolidated Revenue Expected to Increase 20% during 2011 and 2012:
The ratings factor in the expectation that Intercorp Retail's business will continue growing significantly in the next several years due to the positive business environment in Peru and the company's sound diversified retail business strategy. Peru's retail industry has solid fundamentals due to a strong macroeconomic environment, with the economy expected to grow by 4.9% and 4.5% during 2011 and 2012, respectively.
On a pro forma basis, considering the recently acquired Inkafarma, Intercorp Retail's 2010 consolidated revenues were approximately S/.3,761 million with SPSA, Inkafarma, and TPSA representing approximately 64%, 32%, and 5% of revenues. The ratings reflect Fitch's view that Intercorp Retail consolidated revenues will grow by approximately 20% each year during 2011 and 2012 due to new store openings, the solid performance of SPSA and Inkafarma, and significant improvement in TPSA, HCPSA, and Financiera Uno's revenues.
Negative Free Cash Flow due to Investment Cycle and Recent Acquisition:
During the LTM ended June 30, 2011, the company had negative free cash flow of S/. 1,218 million and a negative FCF margin of 29.8%. Negative free cash flow was primarily the result of the Inkafarma acquisition. Fitch's LTM June 2011 FCF calculation considers cash flow from operation (S/.105 million) less capital expenditures and investments (S/.1,218 million). The company's capex and acquisition plan during 2011 and 2012 are expected to reach amounts of S/.450 million and S/.150 million, respectively. The main cash absorbing operating company in terms of capex during 2011/12 period will be SPSA with approximately S/. 365 million (USD129 million) in capex that will primarily be used to fund the construction of the company's new distribution center and food facilities. The company is expected to reach neutral to slightly negative free cash flow by 2013.
High Leverage:
The ratings are constrained by Intercorp Retail's high adjusted gross leverage. As of June 30, 2011, Intercorp Retail's total adjusted debt (on-balance and off-balance) was S/.1.434 million. The company's total on-balance debt was S/. 881 million and it was composed primarily of bank loans, public debt, and financial leasing. The company's off-balance debt associated with operating lease obligations was S/.553 million, resulting from rental expenses of S/.79 million. The company's consolidated financial leverage, measured by the Total Adjusted Debt/ EBITDAR, was 4.6x during the LTM. On a pro forma basis, considering the proposed USD300 million note and an EBITDAR of S/. 311 million during the LTM, the company's gross adjusted leverage is estimated to be 5.6x. The ratings incorporate the expectation that the company's gross adjusted leverage by the end of 2012 will be around 5x.
Adequate Liquidity:
The ratings reflect the company's adequate liquidity and the view that its debt profile will improve with the proposed transaction, as part of the proceeds would be used to pay off a short term loan used to partially fund the recent acquisition of Inkafarma. On a pro-forma basis, the company would have debt amortizations of approximately S/. 88 million, S/. 77 million, and S/. 132 million during 2011, 2012, 2013, respectively. Also incorporated in the ratings is an expectation that the company will maintain adequate liquidity levels. At the end of June 2011, the company had a cash position of S/. 105 million and it is expected to be above S/. 200 million by the end of 2011.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
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