MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings of Grupo Elektra, S.A.B. de C.V. (Elektra):
--Foreign and Local Currency Issuer Default Rating (IDR) at 'BB-';
--Long-term
National Scale Rating at 'A(mex)';
--Short-term National Scale
Rating at 'F2(mex)';
--USD $550 million senior notes due 2018 at
'BB-';
--MXN $3 billion long-term Certificados Bursatiles issuances
(ELEKTRA10-2 and ELEKTRA11) at 'A(mex)';
--Short and long-term
Certificados Bursatiles program for up to MXN $5 billion at '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 linkage between both operations. On the retail side, the ratings are supported by strong growth in revenues, same store sales (SSS) and EBITDA, and 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 linked to those of Banco Azteca because of its retail business strategy of selling on credit (approximately 60% of sales). BAZ's stronger 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 2.5x over the long term. They also take into consideration the controlling ownership by the Salinas family and track record of transactions with related entities. Additionally, the ratings are tempered by the higher business risk profile of the recently acquired payday lending subsidiary, Advance America (formerly NYSE: AEA).
Fitch believes that the retail operation, by diversifying geographically across Latin America, somewhat mitigates revenue concentration (operations in Mexico, both retail and financial, still generate about 86% of the Group's consolidated revenues). Fitch expects continued solid sales and EBITDA generation for 2012, based on moderate growth of the Mexican economy. Over the last few quarters, Elektra's SSS grew at a broadly similar rate as the department store segment, as measured by ANTAD, an industry group. As of 1Q'12, measured over last 12 months (LTM), retail sales grew by 10% above previous year's levels. Operating margins stayed generally stable, at 21% in 1Q'12 LTM (1Q'11 LTM: 22%).
Banco Azteca'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 in maintaining asset quality metrics amid a less favorable economic environment (although impairment levels and reserve coverage ratios have remained stable during 2011 and early months of 2012), as well as the weak operating efficiency ratios arising from the high management costs in the consumer finance business (cost-to-income ratio of 80.3% in 1Q'12). Core profitability continues to improve and most ratios shows some stability, given better contained credit costs (1Q'12: 63.8% 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 from the very weak metrics reported in the 2008 period.
BAZ's loan portfolio has gradually diversified, reducing the relative contribution of consumer loans (65.3% of total as of 1Q'12) and increasing the share of commercial loans, although these remain highly concentrated by borrower. Despite the adverse operating environment in recent years, the bank's management has successfully contained its impact on overall asset quality. Past-due loans as of 1Q'12 were 4.76% of total loans (historical peak in 2009: 8.28%), although write-off levels are still high. 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 11.58% of risk weighted assets as of 1Q'12, while the equivalent Mexican regulatory capital ratio was 12.42% of risk weighted assets for the same period). The securities portfolio had moderate credit and market risk, but further enhances the bank's sound funding and liquidity profile.
At the same time, Elektra's recent acquisition of Advance America, a cash advance provider with operations mainly in the United States, has lowered creditworthiness. As previously stated by Fitch (Feb 16th, 2012), the acquisition of Advance America, which has a higher business risk profile than Elektra, and the fact that its acquisition was partially funded with debt, weakens the company's credit quality within its rating category. As of 2011, Advance America generated revenues USD $626 million and EBITDA of USD $123 million.
For the LTM ended March 31, 2012 consolidated debt to EBITDA (including bank deposits), has diminished to 8.2x, compared to 9.9x 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 (1Q12 LTM) is about 2.5x (about 3.4x adjusted debt to EBITDAR), higher than the same period the previous year. Fitch also estimates that this ratio is around 2.5x (about 2.3x for covenant purposes), on a pro forma basis, when Advance America's operations and debt related to its acquisition are taken into account. The ratings incorporate that, over the long term, total debt to EBITDA, excluding BAZ and other Latin American financial businesses, should fluctuate around 2.5x. The prospect of leverage above 2.5x could pressure the ratings. Fitch also anticipates that Elektra will not allocate further funds to Advance America in the future.
As of March 2012, the retail business' total debt (excluding BAZ and other financial businesses) amounted to MXN$13.9 billion, 26% above the same period in 2011. This amount does not take into account the MXN$2.7 billion Certificados Bursatiles Fiduciarios issuance (DINEXCB-12) by Intra Mexicana, a subsidiary, which took place in 2Q12, nor the assorted bank debt totaling MXN$ 1.35 billion which came due in 2Q12. Debt is made up of bank loans, debt issuances and structured issuances. Furthermore, Fitch estimates off-balance sheet debt related to operating leases at about MXN$ 13.8 billion, when taking into account Advance America's leases. Elektra has paid annual dividends of about MXN $480 million and Fitch expects that this amount will grow moderately.
Key Rating Drivers
Positive: Future developments that may, individually or collectively, lead to positive rating actions include: A sustained decrease in leverage, as well as a sustained improvement in Banco Azteca's credit profile.
Negative: Future developments that may, individually or collectively, lead to negative rating actions include: An accelerated increase in debt, without a corresponding increase in EBITDA on the commercial division, a decrease in EBITDA generation or an increase in debt due to Advance America's operations or contingencies, as well as deterioration in Banco Azteca's creditworthiness.
Fitch also rates the following entities:
--Banco Azteca de
Guatemala, S.A. 'BBB+(gtm)' and 'F2(gtm)';
--Banco Azteca (Panama),
S.A. 'BBB(pan)' and 'F3(pan)';
--MXN $2.7 billion Certificados
Bursatiles Fiduciarios issuance (DINEXCB-12) by Intra Mexicana, a
subsidiary of Grupo Elektra, 'AA-(mex)'.
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
Rating Criteria for Non-Financial Corporates', 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
Evaluating
Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143
Short-Term
Rating Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=663651
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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