SANTIAGO, Chile & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed S.A.C.I. Falabella's (Falabella) ratings as follows:
-- Local currency Issuer Default Rating (IDR) at 'BBB';
-- Foreign currency IDR at 'BBB';
-- USD500 million unsecured bonds first tranche due in 2023 at 'BBB';
-- CLP 94,500 million unsecured bonds second tranche due in 2023 at 'BBB';
--Long-term national scale rating at 'AA (cl)';
--Bonds No. 276, series B at 'AA(cl)';
--Bonds No. 394, series D at 'AA(cl)';
--Bonds No. 468, series F at 'AA(cl)';
--Bonds No. 579, series I and J at 'AA(cl)';
--Bonds No. 578, series G and H at 'AA(cl)';
--Bonds No. 395 at 'AA(cl)';
--Bonds No. 467 at 'AA(cl)';
--Commercial paper instruments No. 028 at 'AA(cl)'/'N1+ (cl)';
--Commercial paper instruments No. 035 at 'AA(cl)'/'N1+ (cl)';
--Commercial paper instruments No. 036 at 'AA(cl)'/'N1+ (cl)';
--Commercial paper instruments No. 037 at 'AA(cl)'/'N1+ (cl)';
--Commercial paper instruments No. 038 at 'AA(cl)'/'N1+ (cl)';
--National equity rating at Level 2 (cl) (Primera Clase Nivel 2);
The Rating Outlook is Stable
These investment-grade ratings reflect the company's dominant business position as a leading regional retailer with store formats that include department stores, home improvement stores, and food retailing businesses. The company has a strong presence in fast-growing economies in the Latin American region - Chile, Peru and Colombia - and recently entered the Brazilian home improvement market. These countries offer a combination of relatively stable macroeconomic conditions, positive trends in disposable income and consumption among a growing middle class, and low but rapidly increasing formalization of the retail sector.
The company complements its retail business with a proprietary credit card business and retail banking operations in Chile, Peru and Colombia. As of June 30, 2013, the company had 166 retail stores in Chile, 74 stores in Peru, 45 in Colombia and 18 in Argentina. The company's CMR credit card portfolio in Chile, Peru, Argentina and Colombia includes a total of 4.2 million accounts and has an accounts receivable value of approximately USD5.7 billion as of June 30, 2013.
Falabella's credit ratings factor in the relatively high degree of sensitivity of the company's operating results to changes in macroeconomic conditions. They further take into consideration Falabella's track-record of growing its profitable financial services operations while maintaining the portfolio's relatively stable credit quality and adjusting the size of its consumer loans in accordance with changes in the business environment. Falabella's ratings also consider the company's semi-aggressive organic growth strategy, which should result in about USD2.5 billion of capital expenditures during the next three years, and its moderate financial leverage excluding banking operations.
The Stable Outlook incorporates the view that Falabella's credit profile should remain relatively unchanged in the medium term. Gross financial leverage - excluding liabilities related to the banking business - is expected to remain stable at about 3x, as capex and financial services needs are projected to be funded primarily with the company's cash flow generation. Also considered in the Stable Outlook is the expectation that the risk profile of the company's credit portfolio will remain relatively unchanged.
KEY RATING DRIVERS:
Diversified Business Model Reduces Risks
Falabella's business model entails key integration of the businesses in its retail division. These businesses include department stores, home improvement stores, supermarkets, the real estate segment, and the financial services segment, which comprises Promotora CMR Falabella S.A. (credit card business in Chile) and Banco Falabella (Chile). Approximately 35% of the company's total revenue comes from international operations. Falabella achieved annual average growth rates of 16% for revenues and 17.4% for its adjusted EBITDAR margin from 2010 through 2012. In the last 12-month period (LTM) ended March 31, 2013, the company's total revenues and adjusted EBITDAR reached CLP6,025 billion and CLP987 billion, respectively, resulting in an adjusted EBITDAR margin of 16.4%. The company's 2013 revenue growth rate is expected to be around 12%. The CMR credit card business (Chile) supports sales in the different formats and is a key driver of sales growth. During 2012, this business accounted for 14.8% of Falabella's consolidated net income. The size of the CMR credit card portfolio (Chile) declined during 2012 and the LTM ended March 31, 2013, as the company moved toward more restrictive rules of origination and credit policies.
Gross Adjusted Leverage Excluding Banking Operations Stable at 3.0x
The company's gross adjusted financial leverage, as measured by total adjusted debt/adjusted EBITDAR, was 4.7x for the LTM ended March 31, 2013. This ratio calculation considers debt related to the company's banking operations. As of March 31, 2013, Falabella's total adjusted debt (on-balance and off-balance) was approximately CLP4,612 billion. Total on-balance debt was CLP4,045 billion and was composed mostly of bank loans, public debt, financial leases and bank deposits. Approximately CLP1,960 billion of this debt was related to the banking operations. The company's off-balance-sheet debt of CPL567 billion consists of lease adjusted debt associated with rental expense. Excluding the debt related to banking operations, Falabella's gross and net leverage ratios are estimated at 2.9x and 2.6x, respectively, at March 31, 2013; this includes debt supporting the CMR credit card operations.
Negative FCF Projected due to Large Capex Plan
During the LTM ended March 31, 2013, Falabella generated negative free cash flow (FCF) of approximately CLP90 billion, representing a negative FCF margin (FCF/LTM Revenues) of 1.5%. Fitch's calculation of FCF for the period considers cash flow from operations (CPL630 billion) less capital expenditures (CLP526 billion) less distributed dividends (CLP194 billion). FCF generation is expected to remain negative during the next two years due to the execution of the company's capex plan, which considers annual capex levels of USD887 million, USD871 million, and USD806 million during 2013, 2014, and 2015, respectively. Distributed dividends are estimated to remain at historical levels.
Adequate Liquidity
Falabella's credit ratings reflect the company's adequate liquidity position. The company's had CHP617 billion of cash and marketable securities as of March 31, 2013, which compares favourably with CLP419 billion of short-term debt. During the LTM, Falabella generated CLP630 billion of cash flow from operations (CFO). The company's access to credit through the banking sector and capital markets provides additional sources of liquidity. The credit card portfolio has a duration of four months as of June 30, 2013.
Portfolio Credit Quality Remains Stable
Positively noted in Falabella's ratings are its track record of managing its credit card business and banking portfolios in a manner that balances business growth and credit quality. Fitch expects Falabella's accounts receivable portfolio to grow moderately in 2013. As of June 30, 2013, the CMR portfolio (Chile) reached gross loan levels of CLP935,829 million, which represents a decline of 11% versus the level as of June 30, 2012. During this time period, the duration of the CMR portfolio declined to 4.0 months from 4.6 months. Banco Falabella's (Chile) gross loan portfolio was CLP1,121,957 million as of June 30, 2013, an increase of 10% versus June 30, 2012. The CMR credit card business (Chile) and Banco Falabella (Chile) have maintained stable levels of provisions during the LTM with loan provisions at 4.5% and 4%, respectively.
Recent Acquisition Neutral to Credit Quality:
Fitch views Falabella's recent acquisition of 50.1% of Brazilian home improvement chain CONSTRUDECOR SA for a total amount of BRL388 million (approximately USD187 million) as neutral to Falabella's credit quality. CONSTRUDECOR SA operates 57 home improvement stores in the state of Sao Paulo under the brand 'DICICO'. The company recorded 2012 annual sales of approximately BRL789 million (USD381 million) in 2012. All of its stores are leased. Due to the size of this transaction relative to Falabella's cash flow generation and balance sheet, the transaction, which was completed in July, will not materially change Falabella's leverage and liquidity. Strategically, the transaction provides Falabella with the opportunity to enter the growing Brazilian retail market in the home improvement format.
RATING SENSITIVITY:
Positive Rating Actions: Falabella's ratings could be positively affected by significant improvement - above expectations already incorporated - in its cash flow generation, leverage and liquidity metrics.
Negative Rating Actions: A negative rating action could result from some combination of the following: significant deterioration in the credit quality of the company's credit card and banking businesses; lower cash flow generation (EBITDA); and/or debt associated with acquisition activity.
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 - Effective from 8 August 2012 - 5 August 2013
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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=799478
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