NEW YORK--(BUSINESS WIRE)--Fitch Ratings views Cencosud S.A.'s (Cencosud) recent announcement that it has signed a credit card joint venture agreement for its operations in Chile as positive for its credit quality. Cencosud has signed a final agreement through which Banco of Nova Scotia (Scotiabank) becomes the holder of a 51% stake in Cencosud's retail financing business in Chile for a 15 year period.
Upon execution of the transaction, Cencosud would receive a cash payment of approximately USD1.2 billion that would be used to reduce its debt. Of this payment, approximately USD280 million would be from the sale of a 51% share of Cencosud Administradora de Tarjetas S.A. (CAT) to Scotiabank, while the additional USD938 million would be related to the funding of the credit card portfolio by Scotiabank. Currently, the funding of the portfolio is being provided by Cencosud. During the last 12 month period (LTM) ended March 31, 2014, the portfolio being part of the proposed transaction (credit card operations in Chile) generated revenues of approximately USD368 million.
The signed contract includes all the terms needed for the materialization of the partnership. The agreement is subject to approval from the regulators in Chile and Canada; and it is expected to be executed during the second half of 2014. Cencosud will have an option to buy back Scotiabank's 51% stake after 15 years. Scotiabank has a similar partnership arrangement with Cencosud in Colombia through Banco Colpatria.
Cencosud's cash generation, as measured by EBITDAR, was USD1.8 billion during the LTM ended March 31, 2014, including approximately USD325 million in rentals. The company had USD8.3 billion in total adjusted debt as of March 31, 2014. This debt consisted of USD5.8 billion of on-balance-sheet debt and an estimated USD2.4 billion of off-balance-sheet debt associated with lease obligations (rentals). The company's cash position was USD330 million by March 31, 2014. The company's net leverage, as measured by the ratio of total adjusted net debt to EBITDAR, was 4.4x as of March 31, 2014. The company's free cash flow (FCF) during LTM March 2014 was negative USD487 million. FCF calculation for the period considers USD204 million in cash flow from operations (CFFO), USD536 million in capital expenditures, and USD155 million in paid dividends. On a pro forma basis, considering Cencosud uses USD1.1 billion of the proceeds from the signed credit card joint venture transaction to reduce debt, Cencosud's net adjusted leverage ratio would be around 4.0x. Post transaction, the company is targeting to reach positive FCF around USD200 million during 2014.
The company's financial strategy for 2014 includes the successful completion of the announced transaction with most of the net proceeds being applied to reduce debt; divesture of non-core assets; and achieving positive FCF during 2014. The confluence of these factors would likely result in revising the Outlook to Stable from Negative. Conversely, the inability of the company to materially lower leverage during 2014 due to continuation of high levels of debt post execution of this signed credit card joint venture transaction coupled with aggressive capex levels could result in a downgrade.
Additional information is available at 'www.fitchratings.com'.