Fitch Affirms Falabella's IDR at 'BBB'; Outlook Stable

SANTIAGO, Chile & NEW YORK--()--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';

--CLP94,500 million unsecured bonds second tranche due in 2023 at 'BBB';

--Long-term national scale rating at 'AA (cl)';

--Bonds No. 468, series F at 'AA(cl)';

--Bonds No. 579, series 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.

Falabella's 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 Chile, Peru and Colombia and a small participation in the Brazilian home improvement market. The company complements its retail business with a proprietary credit card business and retail banking operations in Chile, Peru and Colombia.

As of March 31, 2014, the company had 175 retail stores in Chile, 90 stores in Peru, 48 in Colombia and 18 in Argentina. The company's portfolio (total gross loans) in the credit card business and banking operations combined totaled approximately USD6 billion. Chilean credit card operations (CMR) and banking operations representing 33% and 38% of the total portfolio, while gross loans in Peru, Colombia and Argentina represented approximately 15%, 10% and 4%, respectively.

Falabella's credit ratings are constrained by 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 factor in the company's semi-aggressive organic growth strategy, which should result in about USD4 billion of capital expenditures during the 2014-2017 period, 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 3.0x, 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 has an integrated business model. Its businesses include department stores, home improvement stores, supermarkets, real estate and 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 operations outside of Chile. In the last 12-month period (LTM) ended March 31, 2014, the company's total revenues and adjusted EBITDAR reached CLP6,901 billion and CLP1,025 billion, respectively, resulting in an adjusted EBITDAR margin of 14.9%. The company's 2014 revenue growth rate is expected to be more than 10%.

Organic Growth Continues to Pressure Free Cash Flow:

Falabella's strong growth in the region is expected to continue limiting free cash flow (FCF) generation, as capital expenditures and high working capital requirements continue to be high. The company's total investment plan for 2014-2017 should reach USD4.1 billion, which will fund 157 new store openings and 15 commercial malls, mainly in Peru, Chile and Brazil. As of LTM ended March 2014, the company exhibited generated negative FCF of CLP137 billion due to CLP359 billion of capex. The company's FCF is expected to remain negative in the low-single digits in the medium term.

Gross Adjusted Leverage Excluding Banking Operations Stable at 3.0x:

Due to large organic growth combined with high debt related to its private credit card CMR and its real estate business, Falabella's gross adjusted leverage measured as total adjusted debt/EBITDAR remains moderate at around 3.3x, excluding banking operations, and nearly 5.2x on a consolidated basis. Despite strong organic growth, Fitch believes the company's leverage levels will remain relatively constant. For 2014-2016, Fitch estimates the company's gross adjusted leverage including banking operations will remain around 5.0x.

CMR Portfolio Risk Management Positively Incorporated:

Promotora CMR Falabella S.A. (CMR) is the largest credit card issuer in Chile. It finances nearly 56% of sales made in Falabella's department stores, 31% of the sales by its home improvement stores, and 19% of supermarket sales. As of Dec. 31, 2013, CMR's gross loans represented 36% of the total consumer loan granted by commercial retailers in Chile, equivalent to 6.3% of all Chilean consumer loans. CMR exhibits good profitability and performance throughout the cycle due to its ample margins, sound cost efficiency and good credit risk management. Past due loans represented 2.25% of gross loans as of March 31, 2014 (2.5% as of Dec. 31, 2013 and 3.2% as of Dec. 31 2012), while debt restructuring represented only 4.2%. Loan provisions - net of recoveries - were 4.6% of gross loans (4.5% in 2013) and net charge offs stood at 4.02% (5.3% in 2013). These levels are considered adequate.

Adequate Liquidity:

Falabella's main sources of liquidity are internal generation consisting of CLP393 billion of CFO during the LTM ended March 31, 2014. Cash and equivalents of CLP625 billion further bolster liquidity. During the 2014-2016 period, the company faces debt maturities of CLP576 billion, CLP197 billion, and CLP147 billion, respectively. The company's liquidity ratio, measured as FCF plus cash and marketable securities over debt service coverage was 0.6x as March 31, 2014. Refinancing risk is low due to the company's financial flexibility resulting from its CFO generation and ample capital market access.

Equity Rating in Level 2:

Falabella's First Class Level 2 equity rating considers the long and consolidated track record in Chilean stock exchange, the securities' relevant size when compared to peers, Falabella's strong credit profile, the company's growth expectations and the conservative risk management of its businesses. Equity rating remains pressured by the high concentration of the property of Falabella, where the Solari and Del Rio families own an 81% of the company, which they control through a shareholder agreement.

RATING SENSITIVITY:

Positive: Future developments that could collectively lead to positive rating action include:

--Gross adjusted leverage - excluding banking operations - consistently below 2.5x;

--Moving towards positive FCF generation (FCF after capex & dividends); and,

--Liquidity ratio, measured as FCF plus cash and marketable securities over debt service coverage, consistently in excess of 1.25x.

Negative: Future developments that could lead to a negative rating action include:

--Significant deterioration in the credit quality of the company's credit card and banking businesses;

--Negative FCF consistently reaching levels around -15% of revenues

--Gross adjusted leverage - excluding banking operations - consistently above 4.0x.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

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=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=849754

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Jose Vertiz
Director
+1-212-908-0641
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrea Jimenez
Associate Director
+562-24993322
or
Committee Chairperson
Joseph Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Jose Vertiz
Director
+1-212-908-0641
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrea Jimenez
Associate Director
+562-24993322
or
Committee Chairperson
Joseph Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com