Fitch Affirms Office Depot de Mexico's IDRs at 'BB+'; Outlook Stable

MONTERREY, Mexico--()--Fitch Ratings has affirmed the following ratings of 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+';

--USD350 million senior notes due 2020 at 'BB+'.

The Rating Outlook is Stable.

The ratings reflect ODM's leadership position in the office products super-store segment, diversified geographical footprint and consistent cash flow generation. The rating also incorporates an expectation of leverage levels of around 2.5x debt-to-EBITDA and adjusted debt-to-EBITDAR of 3.5x in the medium term.

KEY RATING DRIVERS

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 revenue. In addition, its wide distribution network, preponderance of cash sales and mostly local sourcing of inventory, further supports ODM's business profile.

STABLE CASH FLOW GENERATION

The company has shown consistent growth over the past 12 years, with solid EBITDA generation even during economic downturns. Same store sales (SSS) fell -3.6% in 2013, in part due to week GDP growth, while EBITDA margins improved by 53 basis points (bps) compared to full year 2012. SSS declines seem to be moderating, for the first six months of 2014, SSS declined -2.3%. EBITDA margin has dipped to 10.4% for second quarter of 2014 (2Q'14) on a last 12 months (LTM) basis, but EBITDA generation is expected to be about MXN1.6 billion pesos for full year 2014, basically unchanged from full year 2013. Going forward, Fitch expects EBITDA margin to be around 10%.

POTENTIAL FOR INDUSTRY CONSOLIDATION

Fitch believes there are growth opportunities for penetration in smaller cities, as well as some gains achievable in taking away market share from mom & pops and wholesalers. 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 robust growth strategy, with an estimated 30 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.

LEVERAGE TEMPORARILY ABOVE EXPECTATIONS

The ratings include expectations that ODM's debt to EBITDA leverage should be around 2.5x (adjusted debt-to-EBITDAR: 3.5x) in the medium term. For June 30, 2014 LTM, debt to EBITDA was 2.9x, (adjusted debt to EBITDAR: 3.7x). Leverage is expected to improve as SSS stabilize, and EBITDA generation from the recent Marchand acquisition in April 2014 is taken into account. While Fitch envisions short-term deviations from its expected leverage levels due to strategic initiatives, sustained leverage levels above expectations will add pressure to the ratings.

ADEQUATE LIQUIDITY

With cash and cash equivalents of approximately MXN709 million as of 2Q'14 and no material debt maturities until 2020, ODM's liquidity position is manageable. Free cash flow (FCF) before dividends has been mostly positive over the past five years, and Fitch expects modest pre-dividend FCF generation going forward, with Capex around MXN600 million per year in the medium term. Aside from the shareholder loan to Grupo Gigante and its related non-cash shareholder dividends, ODM is able to pay cash dividends in an amount of up to 50% of net income according to covenants. Given this, Fitch would expect for cash to accumulate and to possibly be used for gross debt reduction.

RATING SENSITIVITIES

Factors that could be detrimental to credit quality include weaker-than-expected SSS, lower EBITDA margin, debt-financed acquisitions or other factors that could lead to sustained leverage levels above 3.5x adjusted debt to EBITDAR and 2.5x debt to EBITDA in the medium term.

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 Including Short-Term Ratings and Parent and Subsidiary Linkage' (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=860414

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Contacts

Fitch Ratings
Primary Analyst:
Miguel Guzman-Betancourt
Associate Director
+52 81 8399-9100
Fitch Mexico SA de CV
Prol. Alfonso Reyes 2612.
Monterrey, NL, MEXICO
or
Secondary Analyst:
Indalecio Riojas
Associate Director
+52 81 8399-9100
or
Committee Chairperson:
Alberto Moreno
Senior Director
+52 81 8399-9100
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Miguel Guzman-Betancourt
Associate Director
+52 81 8399-9100
Fitch Mexico SA de CV
Prol. Alfonso Reyes 2612.
Monterrey, NL, MEXICO
or
Secondary Analyst:
Indalecio Riojas
Associate Director
+52 81 8399-9100
or
Committee Chairperson:
Alberto Moreno
Senior Director
+52 81 8399-9100
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com