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 $3.5 billion long-term Certificados Bursatiles
issuances (ELEKTRA13) 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. The ratings also incorporate the strong cash flow generation coming from the recently acquired payday lending subsidiary, Advance America (AEA), as well as the expectation of the retail division's leverage (total debt from retail and AEA to EBITDA from those operations) to be below 2.5 (x) times over the long term. The ratings are supported by an extensive store network across Mexico and Latin America. The rating also takes into account a decrease in revenues at the Mexican retail division that have been offset by better than expected results at AEA.
Grupo Elektra's retail operations are linked to those of BAZ due of its business strategy of selling on credit (approximately 60% of sales). Fitch recently upgraded BAZ's national scale rating by one notch to 'A+(mex)', which is supported by its management expertise in consumer credit, asset quality, strong liquidity and the credit risk of its portfolio. The ratings also take into consideration the controlling ownership by the Salinas family and track record of transactions with related entities.
KEY RATING DRIVERS
Decline in Retail Offset by AEA:
Revenue decline in the Mexican
retail business during the last twelve months as of March 31, 2013 was
offset by better than expected results in AEA. This reduction was the
result of changes in commercialization efforts; however, Elektra has
undertaken initiatives that should stabilize retail revenues for the
second half of 2013. For the last 12 months (LTM) ended March 31, 2013,
retail sales dropped by 8% when compared to previous year's levels.
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
75% of the Group's consolidated revenues).
Elektra's 2Q12 acquisition of AEA, a pay day lender provider with operations mainly in the United States, has mitigated to some extent lower results from the retail business. Fitch views AEA's business risk profile to be higher than Elektra, but this is balanced by BAZ's recent national scale upgrade. Fitch estimates that, as of 2Q13 LTM, Advance America will generate EBITDA in excess of MXN 2 billion.
Improved BAZ Credit Profile:
BAZ's ratings consider the bank's
improved and sustained profitability after considerable growth of its
loan portfolio, exhibiting a rapid recovery after the weak metrics
reported in the 2008 and 2009 years during the global financial crisis.
The bank's adequate ability to absorb losses, its solid funding
structured through an ample, stable, diversified and low-cost base of
core customer deposits, as well as a conservative dividend payout policy
in recent years, are also part of the bank's ratings fundamentals. BAZ's
ratings also consider its broad experience and competitive advantage in
consumer finance, the high management costs with which these kind of
entities (consumer finance business) operate (cost-to-income ratio of
82.2% in 1Q13), the challenges the bank faces to contain the recent
deterioration of its asset quality metrics (non-performing loans/total
loans as of March 2013: 8.20%), mainly derived from the rapid growth of
new businesses; the concentration of its commercial loan portfolio and
its relatively tight capitalization metrics under Fitch's methodologies
(slightly deteriorated recently). Banco Azteca has a robust franchise
that has resulted in good operating performance and liquidity, supported
by its ample base of customer deposits.
BAZ specializes on consumer loans (70% of total loans as of 1Q13), although they have gradually diversified through the years. The bank has increased the share of commercial loans, but these remain highly concentrated by borrower. Fitch believes the robust franchise of Baz's holding company (Grupo Elektra) provides an important competitive advantage to the bank and will be crucial to continue expanding its credit activities. The bank's non-performing loans recently exhibited deterioration (reaching post-crisis levels) in response to the rapid growth of new lending business; however, Fitch expects a recovery as the bank is already addressing this matter.
Leverage Expected to Decline by 2014
The retail operation's gross
leverage (excludings BAZ and other Latin American financial businesses)
is expected to end 2013 at around 2.7x-2.8x, which is higher than
Fitch's long-term expectation. However, Fitch expects leverage to
decline below 2.5x at the end of 2014 as a result of improved results
from both retail and AEA and remain on those levels over the long term.
Fitch estimates that total debt to EBITDA (1Q13 LTM) is about 3.2x (2.7x
for covenant purposes), as AEA started to consolidate at the end of the
second quarter of 2012. Fitch believes that gross leverage should
approximate to 2.8x as of June 30, 2013 considering some debt repayments
during the second quarter of 2013 and 2.4x on a net debt basis. For the
LTM ended March 31, 2013, consolidated debt to EBITDA (including bank
deposits) has diminished to 8.7x, compared to 8.2x over the same period
the previous year.
As of March 2013, the retail business' total debt (excluding BAZ and other financial businesses) was MXN$19.8 billion, from MXN$ 13.9 million in the same period the previous year. Most of this increase is explained by the acquisition of AEA in 2Q12. Debt is composed of bank loans, local and international debt issuances and local structured issuances. Furthermore, Fitch estimates off-balance sheet debt related to operating leases at about MXN$17.5 billion. Elektra has paid annual dividends of MXN$522 million in 2013 and Fitch expects this amount to grow moderately going forward.
RATING SENSITIVITIES
Factors that may, individually or
collectively, lead to positive rating actions include a sustained
decrease in leverage approximating 2.0x over time, a recovery in retail
sales and EBITDA, as well as a sustained improvement in Banco Azteca's
credit profile.
Future developments that may, individually or collectively, lead to negative rating actions include the prospect of leverage above 2.5x for a prolonged period of time, a breach of covenants, an accelerated increase in debt, without a corresponding increase in EBITDA on the retail division or AEA, any material contingency related to AEA that may arise, a deterioration in Banco Azteca's creditworthiness.
Fitch currently rates the below entities as follows:
Banco Azteca de Guatemala, S.A.
--National long-term rating
'BBB+(gtm)';
--National short-term rating 'F2(gtm)'.
Banco Azteca (Panama), S.A.
--National long-term rating 'BBB(pan)';
--National
short-term rating 'F3(pan)'.
Intra Mexicana, a subsidiary of Grupo Elektra
--MXN $3.0 billion
Certificados Bursatiles Fiduciarios issuance (DINEXCB-12) by,
'AA-(mex)vra'.
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;
--'Evaluating Corporate Governance', Dec. 12, 2012;
--'Short-Term
Rating Criteria for Non-Financial Corporates', Aug. 9, 2012;
--'Parent
and Subsidiary Rating Linkage', Aug. 8, 2012.
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
Evaluating
Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649
Short-Term
Ratings Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685553
Parent
and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=796402
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