NEW YORK--(BUSINESS WIRE)--Fitch Ratings views Cencosud S.A.'s (Cencosud) recent announcement that it has signed a binding agreement with Itau Unibanco Holding (Itau) to jointly develop Cencosud's financial retail business as positive for the company's credit quality.
Upon execution of the transaction, Cencosud would receive a cash payment of approximately USD1.6 billion that would be used to reduce its debt. Of this payment, approximately USD280 million would be from the sale of a 51% share of Cencosud Administradora de Tarjetas S.A. (CAT) to Itau, while the additional USD1.3 billion would be related to the funding of the credit cards portfolios by Itau. Currently, the funding of the portfolio is being provided by Cencosud. During the last 12 month period (LTM) ended March 31, 2013, the portfolio being part of the proposed transaction (credit card operations in Chile and Argentina) generated revenues and EBITDA of approximately USD548 million and USD126 million, respectively.
The final agreement is subject to approval from the regulators in Chile, Brazil and Argentina. The agreement would also require approval from creditors on bank loans and locally issued bonds with CAT change of ownership clauses. The agreement is expected to be executed during the second half of 2013.
Cencosud's cash generation, as measured by EBITDAR, was USD1.7 billion during the LTM ended March 31, 2013, including approximately USD300 million in rentals. The company had USD8.2 billion in total adjusted debt as of March 31, 2013. This debt consisted of USD6.1 billion of on-balance-sheet debt and an estimated USD2.1 billion of off-balance-sheet debt associated with lease obligations (rentals). The company's adjusted gross leverage, as measured by the ratio of total adjusted debt to EBITDAR, was 4.8x as of March 31, 2013. On a pro forma basis, considering Cencosud uses all the proceeds from the proposed credit card joint venture transaction, Cencosud's gross adjusted leverage ratio would be around 4.2x.
Successful completion of the proposed transaction with most of the net proceeds being applied to reduce debt, in addition to a conservative approach to growth, would likely result in Cencosud's adjusted gross leverage trending to the range of 3.0x to 3.5x during the next 12 months. The confluence of these two factors would likely result in removing the Negative Outlook and the assignment of a Stable Rating Outlook.
Conversely, the inability of the company to materially lower leverage during the next 12 months due to continuation of high levels of debt post execution of proposed transaction coupled with aggressive capex levels and continued focus on inorganic growth could result in a downgrade.
Fitch currently rates Cencosud as follows:
--Long-term Issuer Default Rating (IDR) 'BBB-';
--Local Currency IDR 'BBB-';
--USD750 million unsecured notes due in 2021 'BBB-';
--USD1.2 billion unsecured notes due in 2023 'BBB-'.
The Rating Outlook is Negative.
Cencosud's ratings are supported by its solid regional market position, business and geographic diversification, and stable cash flow generation. The factors constraining the rating include the company's high leverage driven by fast growth through acquisitions and its exposure to high political and economic risk in Argentina.
The Negative Outlook reflects challenges the company will continue to face as it seeks to lower adjusted leverage to around 3.5x. Cencosud's plan to lower debt entails limiting capital expenditures to around USD800 million, scaling back on acquisition activity, and focusing on integrating its acquired assets. Challenges the company faces in lowering debt organically include repatriating proceeds from its business in Argentina, which represent about 20% of the company's EBITDA.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'National Ratings Criteria', Jan. 19, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
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