NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of General Shopping Brazil (GSB) and its fully owned subsidiaries as follows:
General Shopping Brasil S.A. (GSB):
--Foreign currency Issuer Default Rating (IDR) at 'BB-';
--Local currency IDR at 'BB-';
--National scale ratings at 'A-(bra)'.
General Shopping Finance Limited (GSF):
--Foreign currency IDR at 'BB-';
--USD250 million perpetual notes at 'BB-'.
General Shopping Investment Limited (GSI):
--Foreign currency IDR at 'BB-'.
--USD150 million subordinated perpetual notes at 'B'.
Simultaneously, Fitch has withdrawn the IDRs for General Shopping Finance Limited (GSF) and General Shopping Investment Limited (GSI).
The Rating Outlook for GSB has been revised to Negative from Stable.
The Negative Outlook reflects the weakening of the company's capital structure driven by high capex levels during the last two years resulting in net leverage ratios around 8.5x, which is above expectations previously incorporated in the ratings. Execution risks remain as the company seeks to lower its adjusted net leverage ratio to levels around 6x through the divesture of non-core assets and lowering capex levels during the next 24 months.
The ratings continue to reflect GSB's important position in the shopping markets in the southern and southeastern regions of Brazil, its stable and predictable cash flow generation, as well as its low working capital requirements with leases responsible for most maintenance expenses, adequate liquidity position and manageable debt amortization schedule. GSB's credit ratings are constrained by its high leverage, limited geographical and revenue diversification.
KEY RATING DRIVERS:
Business Position Support Stable Margins:
GSB's ratings reflect the company's position as one of the largest shopping center operators in Brazil's southeastern and southern regions with participation in 18 shopping centers and a total owned gross leasable area (GLA) of 270,000 square meters as of June 30, 2014. Fitch expects GSB to maintain stable EBITDA margins of around 70% in 2014 and 2015. The company maintains a high occupancy level of 96.4% as of June 30, 2014. This level has remained stable during the last four years. The company's revenue per square meter increased 12.5% during first-half 2014 versus the same period in 2013.
High Leverage above Expectations:
GSB's net leverage is high and weak for the rating category; the company is in the process of divesting some assets, which should support a reduction in leverage during the second half of 2014. GSB's total debt increased to BRL1.6 billion, as of June 30, 2014, from BRL1.1 billion in June 2012. The company's net leverage ratio, as measured by net debt/EBITDA, was 8.4x as of June 30, 2014. This represents a significant increase from 5.9x in June, 2012. During third-quarter 2014, the company sold its 50% stake in Santana Parque Shopping and its 100% stake in Top Center. Total combined proceeds from both transactions were around BRL290 million.
GSB's liquidity is viewed as adequate with an average debt tenor in excess of five years. The company's current cash balance is sufficient to meet all debt payments through 2015. As of June 30, 2014, GSB had BRL248 million of cash and marketable securities, which covers short-term debt by 1.4x. The company's cash position is anticipated to be boosted with the proceeds obtained from recent asset divesture. GSB maintains approximately 33% of its total GLA as unencumbered assets. The estimated market value of these assets is approximately BRL1 billion, covering 1.4x its level of unsecured debt, which provides an additional source of liquidity. GSB's total investment property value is estimated at about BRL3.2 billion, as of June 30, 2014. The company's cash position and level of unencumbered assets partially offset its relatively weak levels of interest coverage, which has consistently been around 1x during the last three years.
Business Fundamentals and Limited Diversification Incorporated:
The ratings factor in a positive view on the Brazilian mall industry's fundamentals in the medium to long term, which include Brazil's positive demographic changes and a growing middle class. GSB's top five malls represent approximately 50% of its total net operating income (NOI). This degree of concentration is a rating limitation. The company's substantial FX risk is incorporated in its ratings. GSB's exposure to foreign exchange risk is material with approximately 45% of the company's total debt being USD denominated.
Considerations that could lead to a negative rating action
A negative rating action could result from the company's failure to reduce its net leverage during the next 12 month period ended in June 2015 due to some combination of lower cash flow generation (EBITDA), and/or incremental debt associated with new developments. A weakening of the company's liquidity position would also hinder credit quality and could result in a negative rating action.
Considerations that could lead to a positive rating action
The company capacity to maintain adequate liquidity with a cash position of about BRL350 million and its net leverage trending toward the 6.5x during the next 12 month period ended in June 2015 could result in revising the Negative Outlook.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Linkage Between Holding Companies and Subsidiaries' (May 28, 2014);
-- Brazilian Shopping Malls Dashboard 1H14 (June 17, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Brazilian Shopping Malls Dashboard 1H14