NEW YORK--()--Fitch Ratings has assigned the following ratings to Maestro Peru S.A. (Maestro)
--Foreign currency Issuer Default Rating (IDR) 'B+';
--Local currency IDR 'B+'
--Proposed senior unsecured notes 'BB-/RR3'
The target amount of the proposed issuance will be up to USD180 million; the final amount of the issuance will depend on market conditions. Proceeds from the seven year proposed issuance will be used primarily to fund the company's capital expenditures plan, refinance existing debt, and strengthen the company's liquidity.
The Rating Outlook is Stable
The ratings reflect Maestro's leading market position, positive business environment, stable operating margins, and support from its controlling shareholder. The company is implementing an aggressive capex plan that will increase leverage and lead to negative free cash flow (FCF) in the near- to intermediate term. Maestro has limited business and geographic diversification, as the company's operations are concentrated in one retail business format in Peru. Competition in the market is increasing, but penetration levels remain low. The ratings also consider the sensitivity of the construction and home improvements industry to economic cycles. The 'BB-/RR3' ratings on the company's unsecured senior notes debt reflect good recovery prospects that are anticipated to be in the range of 50%-70% in the event of a default.
Solid Business Fundamentals
Maestro is expected to continue to benefit from the solid industry fundamentals of Peru's home-improvement industry, as a result of the country's positive macroeconomic environment that is increasing purchasing power of households. Low penetration levels also bode well for the industry and Maestro. Maestro has a strong business position as one of the two dominant home retailers in Peru, with an estimated market share of 43%.
As of Aug. 31, 2012, the company had 20 stores located throughout Peru, and it plans to open three additional stores during the rest of 2012. The Peruvian home improvement industry's low penetration levels - estimated at around 19% at the end of 2011 - support an expectation of high growth potential for the company's operations. Maestro is well-positioned as a low price specialist in project-based sales. The Peruvian economy is forecasted to post growth rates of 5.8% and 6.2% during 2012 and 2013, respectively, after growing 6.9% in 2011.
The ratings also consider Maestro's success at expanding. Over the past five years, as a result of new stores openings and increasing consumption and self-construction demand. The overall positive business environment in Peru is expected to continue during the company's current expansion phase.
Maestro's revenues during 2011 and the last 12 months (LTM) ended in June 2012 was PEN1,019 million and PEN1,128 million, representing growth rates of 28% and 11%, respectively, over the same periods of prior year. Maestro's EBITDAR levels during the same periods reached levels of PEN103 million and PEN113 million, with stable EBITDAR margins above 10% during 2011 and the LTM ended June 30, 2012. In addition, Fitch views positively the performance of the company's controlling shareholder, Enfoca Inversiones (Enfoca), across numerous sectors in Peru. Enfoca maintains a 95% ownership participation in Maestro and has helped the company to grow, develop, and become more competitive.
Maestro's FCF is expected to remain negative driven by capex plan. The ratings incorporate an expected increase in the company's gross leverage from 3.6x as of June 30, 2012. Pro-forma the transaction amount, which is expected to be up to USD180 million, Maestro's leverage will increase 5.5x. By the end of 2014, Fitch projects the company's leverage to be in the range of 4.0x to 4.5x.
The company is implementing a PEN545 million capex plan during the 2012-2014 periods. Maestro's FCF will remain negative during this period. Maestro's credit ratings incorporate an expectation that the company will be able to deleverage as its new stores mature and its investments in working capital begin to decline.
Liquidity Expected to Improve Post Issuance
As of June 30, 2012, Maestro's cash and short-term debt was PEN16 million and PEN172 million, respectively. The company is expected to gain financial flexibility with the proposed transaction by improving its debt payment schedule and rebuilding its cash position. The company's liquidity has been relatively weak in the past as the company funded its negative free cash flow from heavy investments with short-term debt.
Maestro's capex levels during 2011 and the LTM ended June 30, 2012 were PEN157 million and PEN155 million, respectively; negative FCF margins during this time period were -12% and -11%, respectively. The ratings incorporate an expectation that Maestro will maintain adequate liquidity post issuance in the range of PEN100 million to PEN200 million range during the 2012 - 2013 period and that the company's short-term debt will be between PEN10 million to PEN20 million during the next years.
The Stable Outlook reflects Fitch's expectation that Maestro will continue to deliver positive operating results due to its solid market position and the positive trends of Peru's home improvement industry. Maestro is expected to complete its capex plans, as scheduled during 2012 - 2014 period, without a further increase in leverage post issuance, and that the company will maintain adequate liquidity going forward. The Stable Outlook also incorporates the view that the company's adjusted gross leverage will trend toward 4.5x by the end of 2013.
A negative rating action could be triggered by a deterioration of the company's credit protection measures due to its sizeable investments. FCF margins consistently above 12% couple that are funded with incremental debt could lead to a rating action. An upgrade is not likely until the company completes its capex plan and reverses its cash flow trends and lowers leverage. Key rating drivers include the development of the Peruvian macroeconomic environment in which the company operates and Maestro's business strategy as to organic and inorganic growth.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria