NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Intercorp Retail Inc. (Intercorp Retail) and Intercorp Retail Trust (IRT) as follows:
Intercorp Retail
--Foreign currency Issuer Default Rating (IDR) 'BB';
--Local currency IDR 'BB'.
IRT
--Foreign currency IDR 'BB';
--USD300 million senior guaranteed notes due in 2018 'BB'.
IRT, a fully owned subsidiary of Intercorp Retail, is a trust formed under the laws of the Cayman Islands solely to issue the guaranteed notes.
Fitch has also affirmed the ratings of Interproperties Holding (Interproperties) as follows:
Interproperties:
--Foreign currency IDR 'BB';
--Local currency IDR 'BB'.
Interproperties Finance Trust (IFT):
--Foreign currency IDR 'BB';
--Local currency IDR 'BB';
--USD185 million senior secured notes 'BB'.
IFT is a trust constituted under the laws of the Cayman Islands solely to issue the secured notes. The notes are structured as if they were senior secured obligations of Interproperties.
The Rating Outlook for Intercorp Retail, IRT, Interproperties and IFT is Stable. The ratings of these companies are linked through Fitch's parent and subsidiaries rating criteria.
Intercorp Retail's ratings reflect its diversified business model, continued growing operations, and solid market position in Peru's supermarket, pharmacy retail, and real estate segments. Factors that constrain the rating are the company's high leverage and negative free cash flow generation due to a significant capex plan being developed. The ratings also consider the company's limited geographic position, as all of its retail operations are in Peru, and the increasing competition in Peru's highly concentrated formal retail sector, as key competitors are implementing significant capex plans to expand operations.
Interproperties' ratings reflect its solid business position in Peru's shopping center industry with participation in eight shopping centers, stable and predictable cash flow generation, and the low working capital requirements nature of the industry. Incorporated in the ratings is the Interproperties' stable revenue stream derived from its lease portfolio and the credit profile of its main tenants. The lease revenues are predominately fixed in nature and also provide for the pass-through of ongoing maintenance and operating expenses for the company's properties, which lowers business risk. Factors that constrain the rating are limited asset and tenant diversification, high leverage, and the execution risk related to its capex plan.
RATING DRIVERS:
Integrated Retail Business Model Support Business Position:
Fitch views Intercorp Retail's business position in the Peruvian retail industry as solid driven by a sound business strategy of developing and integrating several retail formats with its real estate operations to meet growing needs of Peruvian consumers. Intercorp Retail manages a leading multi-format retail operation in Peru, which primarily include Supermercados Peruanos, Eckerd Peru, the operator of the InkaFarma brand, and InRetail Real Estate, the operator of Real Plaza shopping center chain. These three core businesses support Intercorp Retail's cash flow generation, representing approximately 44% (Supermarkets), 32% (Retail Pharmacy), and 24% (Shopping Centers) of the company's total adjusted EBITDA. The company's business model of integrating retail operations with its shopping center platform allows attracting growing consumer traffic through its retail brands and locations, and enhances the company's ability to develop commercial sites and attract and develop adequate tenant mix.
Solid Market Share in Core Businesses:
The supermarket chain is the second largest in Peru, with an estimated market share of 33% - based on revenues - as of June 30, 2013. The pharmacy chain is the largest in Peru, with a 53% market share in the formal segment. InRetail Real Estate is the leader in the Peruvian's shopping center industry with a market share of 20% over the country's total gross leasable area (GLA). In addition, Intercorp Retail is also expanding retail operations in the department store, consumer finance and home improvement businesses, which are currently no material in terms of cash flow generation due to the early stage of development of these businesses.
The company margins are expected to remain stable. Intercorp Retail's achieved consolidated revenues, EBITDA, and EBITDAR of S/. 5.7 billion, S/.422 million, and S/. 526 million, respectively, during LTM June 30, 2013. This resulted in the company's EBITDA and EBITDAR margins of 7.4% and 9.3%, similar to those levels achieved in 2012
Consolidated Leverage Expected to Remain High:
The ratings are constrained by Intercorp Retail's high adjusted gross leverage driven by high capital expenditures (capex). The company is expected to maintain similar capex levels during the next 12 month period ended in June 2014, capex levels will be funded with the company's own resources and incremental debt. Intercorp Retail's consolidated financial gross and net leverage ratios, measured by the Total Adjusted Debt/ EBITDAR and Net Adjusted Debt/ EBITDAR, were 5.4x and 4.3x, respectively, during the LTM June 30, 2013. The company reached cash flow from operations and capex levels of S/.200 million and S/.643 million during LTM June 2013, resulting in negative free cash flow (FCF) of S/.443 for the period. The company's LTM capex levels were primarily funded with proceeds from the USD460 million IPO completed by InRetail Peru Corp. during the fourth quarter of 2012. InRetail Peru Corp. is the holding company for the supermarket, retail pharmacy, and real estate operations and it is 58% owned by Intercorp Retail Inc.
As of June 30, 2013, Intercorp Retail's total adjusted debt (on-balance and off-balance) was S/.2.8 billion. The company's total on-balance debt was S/.2.1 billion and it was composed primarily of bank loans, public debt, and financial leasing. The company's off-balance debt associated with operating lease obligations was S/.729 million, resulting from LTM June 2013 rental expenses of S/.104 million. The company maintains approximately a combination of 2/3 versus 1/3 in terms of the number of owned stores versus rented stores at the consolidated levels
Adequate Liquidity:
The company's liquidity is viewed as adequate considering its capacity to maintain satisfactory coverage ratios and the company's credit access. The company is not expected to maintain substantial cash position. Intercorp Retail ended 2012 with solid cash position of S/.1.2 billion, which has been declining through 2013 as the capex plan was executed. The company's coverage ratio measured as total EBITDAR over interest expenses plus rents was 1.8x and 1.6x during 2012 and LTM June 2013. The company's had S/. 567 million of cash and marketable securities as of June 30, 2013, which compares favorably with S/.313 million of short-term debt.
Interproperties, Capex Plan Execution as Scheduled:
The company's capex plan is being executed according to the original schedule. During LTM June 2013, Interproperties' total revenues and adjusted EBITDA reached levels of S/.82 million and S/. 67 million, resulting in EBITDA level of 82%. The company's capex during LTM were S/.149 million funded partially with S/.92 million equity increase completed during the period. By the end of June 30, 2013, the company's total gross leasable area (GLA) was 213 thousand square meters (m2). The completion of Interproperties' scheduled capex - with the major development of Salaverry mall scheduled to start operations in April 2014 - is expected to result in the increase of Interproperties' revenue to S/.145 million in 2014.
Interproperties, Financial Leverage to Decline in 2014:
The ratings incorporate the expectation that Interproperties' financial leverage will decline as major developments are completed and start operations. The company's gross leverage, measured by Adjusted EBITDA/ Total Debt was 7.4x by the end of June 30, 2013. Interproperties' financial leverage is expected to decline reaching levels below 5.5x by December 2014. The Salaverry mall will add 75 thousand of m2, an increase of 35% over Interproperties' current levels.
Good collateral support. The structure of the USD185 million secured issuance is secured by assets, which are composed by real properties with a commercial value of approximately USD175 million as of June 2011. These properties have increased its value - as the company has developed its capex plan - reaching a total value of approximately USD260 million by June 30, 2013. The loan to value ratio as of June 30, 2013 is estimated at 70%.
RATING SENSITIVITIES:
The Stable Outlook for Intercorp Retail and Interproperties' ratings incorporate the view that the consolidated adjusted gross leverage will remain around 5x during the next 12 month ended in June 2014.
Negative Rating Actions: A rating downgrade could be triggered by a decline in the Peruvian macroeconomic environment affecting retail operations' cash flow generation, delays in the capex plan execution for Interproperties' operations, and/or incremental debt associated with acquisition activity.
Positive Rating Actions: Intercorp Retail and Interproperties' ratings could be positively affected by significant improvement in consolidated margins, leverage and liquidity above the levels incorporated in the ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 8, 2012.
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=807088
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