MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to Office Depot de Mexico S.A. de C.V. (ODM):
--Foreign currency Long-term Issuer Default Rating (IDR) at 'BB+';
--Local currency Long-term IDR at 'BB+';
--Proposed USD350 million senior notes due 2020 at 'BB+(exp)'.
The Rating Outlook is Stable.
Proceeds from the offering will be used to finance part of the buyout of Office Depot Inc.'s 50% ownership in ODM by Grupo Gigante (Gigante). On June 3, 2013, Gigante signed a stock purchase agreement acquiring the remaining 50% of ODM through a bridge loan for up to MXN8.85 billion. Half of the bridge loan will be paid by the notes' issuance, with the remainder paid for by an initial public offering (IPO) by Gigante of ODM. The bridge loan has guarantees by all subsidiaries, including ODM. Despite ODM not being able to pay dividends as per the covenants, Fitch believes that Gigante has flexibility to service the remaining debt of the bridge loan were the IPO to be delayed. As per the description of the notes, the shareholder dividend declared by ODM prior to the issuance and related to the shareholder loan are excluded from those restrictions.
The ratings reflect ODM's leadership position in the office products super-store segment, diversified geographical footprint, low historical adjusted leverage, and generally consistent free cash flow (FCF) generation. The rating also incorporates the company's new leverage structure, of about 2.6x debt-to-EBITDA and adjusted debt-to-EBITDAR of 3.5x, based on the proposed USD350 million issuance.
ODM's operating profile is supported by its national retail presence in Mexico, as well as its operations in Central America and Colombia, its mix of large corporate customers, small businesses and consumers. It has a leading position among Mexican office supply super stores, while non-Mexican sales represent about 15% of total sales. In addition, its extensive distribution network, preponderance of cash sales and mostly local sourcing of inventory, further supports ODM's business profile.
The company has shown consistent organic growth over the last 12 years, with solid EBITDA generation even during economic downturns. Fitch expects EBITDA margin to be in the 10%-11% range as the Carvajal operation, acquired in late 2010, is being fully migrated to ODM's business model. Same store sales (SSS) were about 2.9% in 2012, in line with previous years. EBITDA margin has held broadly constant at 10.5% as of second quarter 2013 (2Q'13), on a last 12-months (LTM) basis.
The Mexican office supply industry is very fragmented, with the potential for consolidation by big players such as ODM. Going forward, ODM will pursue a modest growth strategy, with about eight store openings per year on average, most of them within Mexico. Fitch expects these openings to be funded with internally generated cash flow, as the company has done in the past. Fitch also believes there are growth opportunities for penetration in smaller cities, as well as some gains achievable in taking away market share from mom & pops.
Fitch expects the proposed USD350 million senior notes to increase leverage to around 2.6x-2.5x on a debt-to-EBITDA basis adjusted debt-to-EBITDAR: 3.x5-3.4x) for the next few years. Prior to the proposed issuance, adjusted financial leverage (adjusted debt/EBITDAR), is 1.5x as of 2Q'13 LTM. Adjusted leverage is currently completely derived from operating leases, as the firm does not have any debt on its balance sheet as of 2Q'13.
ODM's liquidity position is adequate, with cash and cash equivalents of approximately MXN620 million as of 2Q'13. FCF after dividends has been mostly positive over the past four years, averaging about MXN60 million, and Fitch expects modest FCF generation going forward, with Capex around MXN600 million per year in the medium term. After the USD350 million issuance and aside from its related shareholder loan and shareholder dividend to Gigante, the issuer will not be able to pay dividends, according to covenants, so Fitch would expect for cash to accumulate, to be used possibly for gross debt reduction.
RATING SENSITIVITIES
Factors that could be detrimental to credit quality include weaker-than-expected SSS, lower EBITDA margin, or other factors that could lead to higher-than-expected leverage in the medium term, including the liability related to guarantees derived from the bridge loan granted to Gigante to fund the acquisition of 50% of ODM from Office Depot Inc.
Factors that could improve creditworthiness include stronger-than-expected operating results or lower debt levels that lead to adjusted debt-to-EBITDAR ratios below 2.5x, as well a commitment from a financial policy standpoint to permanently maintain leverage at this lower level.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 5, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=801092
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