NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the ratings of General Shopping Brasil S.A. (GSB) as well as those of its subsidiaries. See the full list of rating actions at the end of this release.
The rating downgrade reflects GSB's very high levels of credit risk. Fitch views GSB's liquidity as unsustainable due to its high financial leverage. Fitch's rating case estimates GSB's 2015 EBITDA, cash interest paid, and cash tax paid at BRL198 million; BRL258 million; and BRL55 million, resulting in funds flow from operations (FFO) of negative BRL116 million. The company's total cash flow from operations for 2015 is estimated to be negative at around BRL142 million. Without a material change in the company's capital structure and/or Brazil's business environment - including foreign exchange FX volatility - GSB's limited capacity to cover interest expenses and taxes with its operational cash flow is expected to result in a deterioration of its liquidity position during 2016.
The ratings have been removed from Rating Watch Negative.
KEY RATING DRIVERS
High Leverage Driven by FX Exposure: GSB's capital structure is viewed as untenable due to excessive financial leverage. The company's high financial leverage is expected to remain under pressure during the next quarters driven by GSB's FX exposure. All of the company's cash flow, measured as EBITDA, is generated in local currency, Brazilian reais, while approximately 55% to 60% of its total debt is U.S. dollar-denominated. GSB's last 12-month period ended Sept. 30, 2015 (LTM September 2015) saw EBITDA of BRL178 million, and total adjusted debt of BRL2.2 billion. GSB had net total debt-to-EBITDA of 11.3x as of Sept. 30, 2015.
Efforts to Reduce Leverage Incorporated: GSB executed several transactions targeting toward reduce its consolidated U.S. dollar-denominated debt during the second half of 2015 (2H15). These transactions included a tender offer for a portion of its USD250 million perpetual notes, an equity injection, and some assets sales. However, the final impact of these efforts on the company's capital structure is being offset by the further devaluation of the local currency against the U.S. dollar and increasing costs of funding in the local market. Fitch's base case forecast considers the company's financial net leverage to be around 9x during 2015-2016.
Quality Assets and Subordination Incorporated in Debt Recovery: As of LTM September 2015, GSB's total assets were valued at an estimated BRL3 billion (approximately USD769 million considering FX at 3.9x), with encumbered and unencumbered assets representing approximately 80% and 20%, respectively, of the total assets value. The Recovery Rating (RR) of 'RR2' for the senior perpetual notes reflects the above-average recovery prospects in an event of default. The 'RR5' for the subordinated perpetual notes reflects poor recovery prospects in an event of default. Fitch recovery analysis for the senior perpetual notes resulted in higher values but it has been capped at 'RR2' considering that some jurisdiction's issues could affect the recovery prospects.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for GSB's ratings include:
--Total net leverage consistently around 9x during 2015-2016;
--Interest coverage (EBITDA/gross interest expenses) consistently around 0.75x during 2015-2016;
--Negative FCF generation during 2015-2016.
RATING SENSITIVITIES
The following factors may have a negative impact on GSB's ratings:
Future developments that may, individually or collectively, lead to a negative rating action include further deterioration of GSB's liquidity position, execution of a distressed debt exchange, and, if the company defaults on its scheduled amortization/interest payments and/or formally files for bankruptcy protection.
The following factors may have a positive impact on GSB's ratings:
Future developments that may, individually or collectively, lead to a positive rating action include material improvement in the company's liquidity and financial leverage through some combination of the following actions: equity injection, asset sales with limited impact on cash flow generation, and lower FX exposure.
LIQUIDITY
Weakening Liquidity: GSB's FCF is expected to remain negative due to excessive cash interest payments during 2015-2016. GSB's high leverage has resulted in excessive cash interest payments and declining interest coverage. GSB has a cash position and short-term debt of BRL175 million and BRL171 million, respectively, and approximately BRL589 million (USD151 million) in unencumbered assets as of Sept. 30, 2015. On Sept. 8, 2015, the company exercised its right to defer the payment of interest under its USD150 million 10% perpetual subordinated notes. The interest payment deferral does not constitute an event of default under the indenture; however, it points to GSB's choice to preserve liquidity in this stressful environment.
FULL LIST OF RATING ACTIONS
Fitch has downgraded GSB's ratings as follows:
--Foreign currency Issuer Default Rating (IDR) to 'CC' from 'CCC';
--Local currency IDR to 'CC' from 'CCC';
--National Scale rating to 'CC(bra)' from 'CCC(bra)'.
General Shopping Finance Limited (GSF):
--USD250 million perpetual notes to 'CCC/RR2' from 'B-/RR2'.
General Shopping Investment Limited (GSI):
--USD150 million subordinated perpetual notes to 'C/RR5' from 'CCC-/RR5'.
The ratings were removed from Rating Watch Negative.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995708
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995708
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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