MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB-' rating to Elektra S.A.B. de C.V's (ELEKTRA) US$150 million reopening of its senior notes due 2018. The notes are unsecured and have the guarantee of all non-regulated subsidiaries, among others:
--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 reopening are expected to be used primarily for potential acquisitions, domestic or international, and, to a lesser extent, for general corporate uses.
Fitch currently rates Grupo Elektra as follows:
--Foreign and Local Currency Issuer Default Rating (IDR) 'BB-';
--Long-term National Scale Rating 'A(mex)';
--Short-term National Scale Rating 'F2(mex)';
--US$400 million senior notes due 2018 'BB-';
--MXN $3,000 million long-term Certificados Bursatiles issuances (ELEKTRA10-2 y ELEKTRA11) 'A(mex)';
--MXN $5,000 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 an 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. The ratings incorporate the company's approach of offering financial services to low-income retail customers, a retail division's leverage (retail division's total debt to EBITDA) of 2.5 times(x) over the long term, controlling ownership by the Salinas family and track record of transactions with related entities.
Fitch believes that the retail operation, by focusing on consolidating operations under the Elektra banner over the last few years, in introducing new products (such as motorcycles), and in diversifying geographically across 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.
Fitch expects solid sales and EBITDA generation for 2012, based on moderate growth of the Mexican economy. Over the last few years, a better business climate, the discontinuation of low profitability product lines, and changes in marketing strategies, have resulted in revenues increasing for the retail division. As of 3Q'11, measured over Last Twelve Months (LTM), retail sales grew by 13% above previous year's levels. Operating margins climbed to 21% in 3Q'11 LTM, above the 19% 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, an ample stream of recurring revenues, adequate capitalization, as well as an ample, stable and diversified base of core customer deposits that allow the bank to maintain a good operating performance and robust liquidity. The ratings also consider the challenges associated to maintain asset quality metrics amid a less favorable economic environment (although impairment levels and reserve coverage ratios have improved steadily in 2010 and the first nine months of 2011), as well as the weak operating efficiency ratios arising from the high management costs in the consumer finance business (cost-to-income ratio of 87.3% in 9M11). Core profitability has recovered to some extent, although most ratios remain relatively volatile, given the better contained credit costs (9M11: 66.3% of pre-impairment operating profits) and a higher contribution of other revenues such as fees and trading income. This has allowed Banco Azteca to gradually rebuild the performance ratios since the very weak metrics reported in the 2008 period.
BAZ's loan portfolio has gradually diversified, reducing the relative contribution of consumer loans (66.7% of total as of 3Q'11) and increasing the share of commercial loans, although these remain highly concentrated by borrower. Despite the adverse operating environment in recent years, the bank management has successfully contained the impact on overall asset quality. Impairments loans as of 3Q'11 were 3.74% (2010: 4.60%), although this is still reliant on a high level of charge offs. Borrower concentration is high, although this risk is partially mitigated by conservative collateral requirements. Capital ratios remain reasonable despite material lending resumption in 2010 and 2011 (Fitch core capital accounted for 10.85% of risk weighted assets as of 3Q'11, while the equivalent Mexican regulatory capital ratio was 12.74% of risk weighted assets for the same period). The securities portfolio (28.9% of total assets at the same date) had moderate credit and market risk, but further enhanced the bank's sound funding and liquidity profile.
For the LTM ended Sept. 30, 2011 and in consolidated terms, debt to EBITDA (including bank deposits), has kept constant at 10.2 times (x), compared to 10.1x over the same period the previous year. Nonetheless, with regards to the retail operation's leverage (which excludes BAZ and other financial businesses); Fitch estimates that total debt to EBITDA (LTM September 2011) is about 3.0x, higher than the same period the previous year. Nonetheless, Fitch estimates that this ratio should be around 2.7x (2.3x for covenant purposes) when the offering and several debt payments made by ELEKTRA during the 4Q'11 and 1Q'12 are taken into account. Fitch expects that, over the long term, total debt to EBITDA, excluding BAZ, should converge towards 2.5x. The prospect of leverage remaining over 2.5x would pressure the ratings.
As of September 2011, the retail business' total debt (excluding BAZ and other financial businesses) amounted to MXN$14.8 billion, 75% above the same period in 2010 (57% when taking into account the aforementioned debt amortizations in 4Q'11). This increase was primarily driven by the issuance in 2011 of Certificados Bursatiles for MXN $2 billion and Senior Notes, due 2018, for US$400 million. Proceeds from these issues were used to refinance debt and increase cash and marketable securities' levels, to fund future Capex in Mexico and Latin America. Debt is made up of bank loans, debt issuances and structured issuances. Elektra has paid annual dividends of about MXN$350 million and Fitch expects that this amount will increase moderately.
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;
--'National Ratings Criteria', Jan. 19, 2011;
--'Evaluating Corporate Governance', Dec. 13, 2011;
--'Short Term Ratings for Corporate Finance', Aug. 12, 2011;
--'Parent and Subsidiary Rating Linkage', Aug. 12, 2011;
--'Operating Leases: Updated Implications for Lessees' Credit, Aug. 5, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143
Short-Term Ratings Criteria for Corporate Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
Operating Leases: Updated Implications for Lessees' Credit
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462222
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