Fitch Affirms Grupo Unicomer's Ratings at 'BB-'; Outlook Stable

NEW YORK & MONTERREY, Mexico--()--Fitch Ratings has affirmed Regal Forest Holding Co. Ltd ratings (Grupo Unicomer) as follows:

--Local currency Issuer Default Rating (IDR) at 'BB-';

--Foreign currency IDR at 'BB-';

The Rating Outlook is Stable.

The ratings reflect the company's leading business position in most of the 18 countries in Central America and the Caribbean and in two countries in South America, where it has presence, through 857 units with 13 different store brands that sell consumer durable products. The ratings incorporate Grupo Unicomer's track record of stable operational results based on a business model that targets low-income to middle-income segments, which represent the majority of the population in those countries where the company operates, through several retail formats. The ratings consider the support and solid financial position of its shareholders Milady Group (Milady) from El Salvador and El Puerto de Liverpool (Liverpool) from Mexico (rated 'BBB+'/Outlook Stable). Supporting the ratings is the company's historic performance of positive cash flow from operations throughout the business cycle.

Grupo Unicomer's ratings are constrained by its growth strategy through acquisitions, which has resulted in about USD300.6 million of working capital and USD121 million of Capex investments since year-end 2011 and adjusted leverage levels above 4.0x. The ratings also factor in the company's credit risk exposure from its consumer finance business model with around 35% overdue accounts receivable as of LTM Sept. 30, 2014 (past due accounts for 90 days or more were 6.8%); this risk is mitigated somehow by the company's track record of its collection procedures and the portfolio yield strategies.

Fitch's previous expectation on adjusted debt to EBITDAR of around 4.0x was not met this year, due to weaker than expected economic environment in some of the markets where the company operates. The company's credit metrics are still within the rating category. The Stable Outlook incorporates the view that Grupo Unicomer's credit profile will be stable in the medium term. Adjusted debt to EBITDAR is expected to be in the 4.0-4.5 times (x) range in the following years, absent additional acquisitions, in addition to stable portfolio credit quality.

KEY RATING DRIVERS

Geographic & Format Diversification Support Predictable Results

Grupo Unicomer's business model provides important integration and synergies among its retail division through a purchasing and logistic company that allows the company to be an efficient operator in many countries and having a competitive advantage in small territories such as those in the Caribbean through ownership or long term leases of prime spots in the islands. Geographic diversification allows the company to have a diverse revenue base due to different dynamics in each of the countries where Grupo Unicomer has presence. Different sources of revenue through product sales, extended warranties, consumer finance, and insurance products provide stability along with the wide array of products that the company offers (electronics, motorcycles, furniture, eyewear, etc.).

Moderate 2015 Revenue Growth Expected

The company's operations have maintained a growing trend, with consolidated revenues of USD1.4 billion as of Sept. 30, 2014, representing a compound annual growth rate (CAGR) of 23.7% in the 2011-2014 period, most of it coming from acquired operations. Fitch expects that the company will continue benefiting from positive demand trends in discretionary products in the markets where it operates. During fiscal year ended 2015, Fitch projects the company's revenues will grow by approximately 2.3%. Fitch expects consolidated EBITDAR margin will range between 11% and 12%.

Shareholders' Solid Position Incorporated

The ratings consider the support and solid financial position of its shareholders Milady (50%) and Liverpool ( rated 'BBB+'/Outlook Stable) (50%) with proven track record in retail since 1847. Milady's Portfolio includes department store chains and all Inditex's franchises in Central America. Liverpool, a department store with 101 units and 24 shopping malls in Mexico had USD5.9 billion in total revenues in the last 12 months (LTM) ended in September 2014 with USD1 billion of EBITDAR in the same period. Total assets were USD7.1 billion with USD4.3 billion in equity. Liverpool's Total adjusted debt/EBITDAR was 1.3x for the LTM ended in September 2014.

Positive CFO Provide Financial Strength

The ratings incorporate Grupo Unicomer's positive FFO and CFO generated throughout the business cycles. The company's cash flow is supported by its profitability and cost controls. Historically, CFO has been sufficient to fund capex and dividend payments; acquisitions of retail chains in Central and South America and the Caribbean have been financed mostly with debt. In 2010 and 2006, Grupo Unicomer received equity injections of USD109 million and USD35 million, respectively, which were used to strengthen the company's financial position.

Limited Inorganic Growth in the Short Term

Historically, Grupo Unicomer has grown through acquisitions. It started in 2000 with the acquisition of Dutch Group CETECO's Central America operations, La Curacao and Tropigas; in 2006 Regal acquired Courts Plc's Caribbean operations. In 2011, the company acquired Artefacta in Ecuador and in 2012 Gollo in Costa Rica. This growth resulted in about USD300.6 million of working capital and USD121 million of Capex investments since year-end 2011. This situation of rapid growth constrains the ratings, given that it has been financed mostly with debt, in conjunction with shareholders' equity contributions of USD109 million in 2010. Total lease adjusted debt to EBITDAR (EBITDA including operating leases) was 4.7x in last 12 months (LTM) ended Sept. 30, 2014; at the end of fiscal year (FY) ended March 2014, 2013, 2012 and 2011 were 4.5x, 4.6x, 3.8x, and 3.5x, respectively.

Neutral Free Cash Flow

The company has recorded positive FCF during this year, due to the slowdown of its expansion strategy. Grupo Unicomer generated positive FCF of approximately USD4 million in LTM ended in September, 2014 and negative FCF of USD10.4 million in fiscal year ended March 2014. Fitch's calculation of FCF considers cash flow from operations less capital expenditures less distributed dividends. The company's FCF generation is anticipated to be neutral or slightly negative during the 2015-2016 period. The company's capital expenditures plan during the next two years is expected to reach annual levels of around USD33 million. Distributed dividends are estimated to be 25% of previous year's net profit for the following years.

Moderate Level of Overdue Accounts Offset by Financial Spread

Grupo Unicomer's ratings factor in the credit risk inherent to its consumer finance business model. At Sept. 30, 2014, the company's portfolio had an average of 35% of overdue (balance) accounts compared to 35.1%, 36% and 34.5% at the end of fiscal year at March 2014, 2013 and 2012, respectively. This risk is partially mitigated by the company's efficient collections program and the track record of its portfolio yield. The company's past due accounts for 90 days or more were 6.8% as of Sept. 30, 2014 and 6.2% and 4.8%, during fiscal years ended in March 2014 and 2013 respectively; during the financial crisis period (2009-2010) this ratio increased to similar levels as current ratios which Fitch considers manageable. The company's uncollectable reserves policy is based on a Roll Rate methodology, which predicts losses based on delinquency. The Roll Rate method measures the percentage of dollars that 'roll' historically from one range of delinquency to the next. At Sept. 30, 2014, the total reserves to +90 days past due balance was 0.87x.

Grupo Unicomer's commercial strategy considers a financial spread sufficient to cover credit risks associated to the portfolio. During the fiscal years ended at March 2014, 2013, 2012 and 2011 the portfolio yield after deducting uncollectable expenses and write offs was around 39.2%, 42.2%, 41.7% and 41.7%, respectively, and LTM as of Sept. 30, 2014 it was 39%.

RATING SENSITIVITIES

Positive Rating Actions: Grupo Unicomer's ratings could be positively affected by significant and sustained improvement (above expectations already incorporated) in its positive cash flow generation, leverage and liquidity metrics.

Negative Rating Actions: A negative rating action could result from some combination of the following factors: significant deterioration in the credit quality of the company's consumer finance business, lower cash flow generation, measured as EBITDAR; and/or incremental debt associated with acquisition activity resulting in the adjusted debt/EBITDAR ratios consistently above 5x.

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=969535

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Contacts

Fitch Ratings
Primary Analyst
Jose Vertiz
Director
+1-212-908-0641
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
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
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jose Vertiz
Director
+1-212-908-0641
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
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
New York
elizabeth.fogerty@fitchratings.com