MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings of Grupo Famsa, S.A.B. de C.V. (Famsa or the Issuer):
--Foreign Currency Issuer Default Rating (IDR) at 'B+';
--Local Currency IDR at 'B+';
--Long-term National Scale Rating at 'BBB(mex)';
--Short-term National Scale Rating at 'F3(mex)';
--USD200 million senior unsecured notes due in 2015 at 'B+/RR4';
--MXN1 billion Certificados Bursatiles issuance due 2014, 'BBB(mex)'.
--MXN1 billion Short-term Certificados Bursatiles programs at 'F3(mex)'.
The Rating Outlook is Stable.
Famsa's ratings reflect its market position in the Mexican retail sector, geographic and product diversification, broadly stable operating cash flow generation by the retail operation, and the strong linkage with its banking subsidiary, Banco Ahorro Famsa (BAF, or the Bank), rated 'BBB(mex)' by Fitch. On the other hand, the ratings are constrained by lower Same Store Sales (SSS) when compared to peers, both in Mexico, and particularly, in the U.S. The 'RR4' rating reflects an expected recovery of between 30% and 50% in case of default.
Regarding revenues, those of BAF have increased strongly over the last few years. Nonetheless, SSS for Mexico (which include financial revenues) have underperformed the industry (as compared to the company's ANTAD peers). Similarly, the U.S. operations have shown a decline in SSS terms since 2008, and double digit decreases in the last two years, resulting in a negative EBITDA of MXN202 million for 2011, mainly driven by operations on the West Coast.
Due to the aforementioned weak results by FAMSA USA, the company has recently announced its openness to consider strategic alternatives with regards to FAMSA's U.S. operations. If any alternative that might be undertaken is able to stem the outflow of cash to FAMSA USA, as well as perhaps diminish the debt burden, it could be considered a leverage-positive development. Continued negative results in the U.S. or failure to undertake any strategic alternative that alleviates this situation, should pressure the ratings.
During 2011, consolidated revenues grew 1.6% on a year-to-year basis, while EBITDA grew 1.2%, constrained by FAMSA USA's negative EBITDA for the year. Full year consolidated total debt to EBITDA and adjusted debt to EBITDAR ratios for 2011 (excluding bank deposits), have risen to 3.4 times (x) and 4.6x, respectively. Including bank deposits these ratios increase to 9.4x and 8.6x, respectively. EBITDA to interest expense and EBITDAR to interest expense plus rents, have remained broadly stable, at 1.4x and 1.2x, respectively for 2011. This reflects the issuer's increased reliance on its banking subsidiary for financing its Mexican customers' purchases.
Famsa's financial division, BAF (around 45% of Famsa's total assets), reflects a good franchise and competitive position in consumer finance mainly in Northeastern Mexico, sustained and consistent financial performance in the last two years, notwithstanding its high loan allowance expenses (2011: 85.7% of pre-tax, pre-reserves net income), reasonable capital adequacy, as well as, lower cost of funding by a diversified and growing base of customer deposits. BAF also shows an intrinsic growth of its loan portfolio, which has contributed to reduce associated expenses; however, customers' sensitivity to a weak economic environment continues to be a limiting factor in the short term for the bank's asset quality (2011: 11.0% of impaired loans to gross loans ; around 26% considering net charge-offs).
During 2011, return on assets (ROA) and return on equity (ROE) were 1.9% and 12.3%, respectively, while efficiency ratio (operating costs to total revenues) was 45.1%. Fitch considers that the main challenges ahead for BAF will be the competitive environment, strengthening operational efficiency and control of credit costs.
Credit risk is BAF's major exposure. While commercial loans have grown considerably (+22.7% in the last year), the portfolio is still mainly composed of consumer loans (73.5% of total portfolio). Adverse economic conditions affected its borrowers' payment capacity, deteriorating its asset quality indicators; however, its past due loans coverage ratios are ample (2011: 143.7%), but asset quality remains weak. Commercial loans (18.5% of total portfolio) are highly concentrated. In Fitch's opinion, BAF's market risk is low.
BAF's funding mix and costs continues with a positive evolution. Customer deposits as its main funding source have demonstrated stability through different phases of the economic cycle. In Fitch's opinion, the moderate portion of liquid assets and the stability of deposits are critical factors that significantly mitigate the bank's liquidity risk.
In Fitch's view the continued profit generation in the last two years has allowed BAF to maintain a reasonable financial position and reduce its dependence for capital infusions from its shareholders. This does not reduce or eliminate inter-company synergies, which will continue in the foreseeable future. At the end of 2011, the regulatory capitalization ratio was 13.1% (2010: 13.0%), and is expected to remain relatively stable in the near future, due to its financial performance.
Famsa is one of the main players in its sector, competing with other national Mexican retail chains such as Elektra and Coppel, which also target the low income segment of the population. In recent years, and as part of its strategy, Famsa increased store openings, both at home and abroad, as a way to improve its market position by diversifying its geographic footprint. Due to recent disappointing results, particularly for U.S. operations, the company has undertaken store consolidations and targeted store openings.
For year-end 2011, Famsa total debt amounted to MXN5.8 billion and bank deposits totaled MXN10.4 billion. Famsa's debt is comprised by bank loans, national short and long term issuances, a USD200 million bond due 2015. Short-term debt as of Dec. 31, 2011 was about MXN2 billion, which, taking into account the company's cash flow generation, cash holdings of about MXN1.4 billion (approximately MXN 1 billion outside of BAF, which is a regulated banking entity), and track record of successfully refinancing short-term debt, should be manageable. The company has not issued dividends for the last few years and it is projecting about MXN400 million of CapEx for 2012.
Key Rating Drivers:
Going forward, Fitch would view an increase in SSS, an upgrade of BAF or a change to a richer mix of sales as generally positive to credit quality. Conversely, it would take a dim view of decreases in EBITDA generation by the retail operation, failure to deleverage due to a strategic event concerning FAMSA USA, or an increase in short-term debt as a percentage of total (non-depositary) debt.
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 Relevant Research:
--'Corporate Rating Methodology' (Aug.12, 2011);
--'National Ratings Criteria' (Jan.19, 2011);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers'(May.12, 2011);
--'Short-Term Ratings for Corporate Finance' (Jan. 18, 2012);
--'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
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489
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
Short-Term Rating Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=663651
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