Fitch Upgrade Grupo Sura's Ratings to 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded Grupo de Inversiones Suramericana S.A.'s (Grupo Sura) long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB' from 'BBB-'. The Rating Outlook is Stable. A full list of rating actions is available at the end of this rating action commentary.

The ratings upgrade takes into consideration the consolidation of both Grupo Sura's diversification and the quality of its dividends flow. Sura Asset Management (SUAM) and Bancolombia are the two largest sources of cash flow to the holding company, which are expected to account for 69% of the dividends received by Grupo Sura in 2015. Both issuers are rated 'BBB+' by Fitch. The rating upgrade also reflects the company's track record of balancing its aggressive growth strategy with an adequate capital structure and its ability to deleverage post acquisitions.

Grupo Sura's ratings reflect the average credit quality of its investment portfolio, diversification in the sources of dividends, and track record of increasing dividends received. The ratings also incorporate Grupo Sura's capacity to consistently maintain adequate liquidity. Further incorporated in the credit ratings of Grupo Sura is the structural subordination of the holding company's debt to the debt at its operating companies. The company's capacity to maintain strong loan to value (LTV) metrics is incorporated as a key rating factor. The company's LTV is estimated at 11.3%, resulting from an assets value of around USD7.5 billion and total debt of USD835 million.

KEY RATING DRIVERS

Strong Credit Quality of Investment Portfolio:

Sura Asset Management (SUAM) and Bancolombia are the two largest sources of cash flow to the holding company, which are expected to account for 69% of the dividends received by Grupo Sura in 2015. Both issuers are rated 'BBB+' by Fitch. SUAM has a business sound profile and generates stable cash flow. It is the largest pension fund manager in Latin America with a presence in six countries and USD113 billion in assets under management. Bancolombia has operations in seven countries in Latin America and is the leading bank in Colombia with a market share of 21.9% by assets and net loans at the end of March 2015.

Stability of Dividends:

During the last five years, dividends recorded a 22% annual growth, driven by the expansion of businesses in Latin America as well as the increasing participation of Grupo Sura in its strategic businesses. Grupo Sura expects to record around COP800 billion (USD291 million) and COP955 billion (USD347 million) in dividends during 2015 and 2016, respectively. The financial and insurance segments should continue as the main source of cash dividends in the medium term. The geographic and product diversification of the five companies that comprise the company's investment portfolio mitigates the concentration of the dividends flow, reinforcing the expectations of a stable trend of dividends flow in the medium term.

Growth Strategy Incorporated:

During the second half of 2015, Grupo Sura increased its controlling position in SUAM to 71.38% from 67.05% as well as it announced the acquisition of RSA Insurance Group plc in Latin America, both transactions reached a total amount of USD881 million which are being funded through a combination of financial debt and internal resources. Also, in February 2016, the company announced that it had signed an option call to acquire an additional 7.3% stake in SUAM for USD538 million.

Positively incorporated into the ratings is Grupo Sura's strong track record of successful investments. The transactions above are consistent with the company's growth strategy, which includes merger and acquisitions activity as an important component. Fitch views these acquisitions as positive from a strategic point of view for Grupo Sura, as it expands the group's insurance operations to other Latin American countries where the company already has a presence in other businesses.

Low Loan to Value, Business Deleverage Expected:

Grupo Sura's track record of funding its inorganic growth with adequate combinations of equity and debt to sustain satisfactory credit metrics is also incorporated in the ratings. Fitch considers Grupo Sura has the flexibility to reduce its leverage in the medium term to levels consistent with its rating category. At the end of September 2015, Grupo Sura ended with a total adjusted debt of COP2.6 trillion (USD835 million), including off-balance sheet obligations of approximately USD300 million of dollar-denominated debt recorded by a special-vehicle purpose. Considering announced acquisitions and assuming Grupo Sura executes the option call in March 2016 - to acquire an additional 7.3% stake in SUAM, Fitch expects Grupo Sura's net leverage should be in the 4x to 5x range during 2016-2017, with a tendency to reduce leverage in the following years.

Adequate Liquidity:

Grupo Sura's dividend stream has shown low volatility in recent years which along with a manageable debt structure profile allows the company to cover adequately its debt service and dividend payments with the dividend inflows. Fitch expects dividends to gross interest ratio to be around 6x in 2015 and to be in the 3x to 4x range in 2016-2017. The company has maintained historically low levels of cash relative to its short-term debt. This is compensated by the stable dividend income and Grupo Sura's ability to access alternative sources of liquidity. During 2016, the company has a scheduled amortization of COP233 billion while from 2017 and onwards debt amortization has a variable structure that depends on the execution of the acquisition program.

Moderate FX Exposure:

The company has moderate exposure to FX volatility. Approximately 63% of Grupo Sura's adjusted debt is dollar-denominated (37% with no hedge in principal payment) while its cash flow is in COPs or other Latin American currencies. The unhedged dollar debt is composed primarily by the USD300 million of international bonds due 2021. Grupo Sura maintains a financial hedge to cover the coupon payments of this issuance, while the long term of the obligation mitigates the currency risk of the principal payment.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Grupo Sura include:

--Total dividends received will reach COP955 billion in 2016, led by an increase in Grupo Sura's stake in SUAM;

--Dividends will record a compound annual growth rate (CAGR) between 3%-6% in 2017-2019 in COP terms;

--Dividends from Bancolombia and SUAM will represent around 70% of total dividends received by Grupo Sura;

--Loan to value (LTV) consistently in the 10% to 15% range;

--Net Leverage levels around 4x to 5x during 2016-2017;

--Interest coverage around 3x to 4x during 2016-2017.

RATING SENSITIVITIES

Positive Rating Actions: Future developments that may, individually or collectively, lead to a positive rating action include:

--Fitch' positive review of Bancolombia's or SUAM credit quality;

--Solid liquidity and consistent improvement in net leverage metrics above those levels incorporated in the ratings;

--Improvement in the company's LTV levels consistently above those levels incorporated in the ratings.

Negative Rating Actions: Future developments that may, individually or collectively, lead to a negative rating action include:

--A downgrade of Bancolombia's or SUAM's IDRs;

--Weakening liquidity and consistent deterioration in net leverage metrics reaching levels consistently above 5x;

--LTV consistently at levels above 20%.

LIQUIDITY

Grupo Sura's dividend stream has shown low volatility in recent years which along with a manageable debt structure profile allows the company to adequately cover its debt service and dividend payments with the dividend inflows. Fitch expects dividends to gross interest ratio to have closed around 6x in 2015 and to be in 3x to 4x range in 2016-2017.

The company has maintained historically low levels of cash relative to its short-term debt. This is compensated by the stable dividend income and Grupo Sura's ability to access alternative sources of liquidity. During 2016, the company has a scheduled amortization of COP233 billion while from 2017 and onwards debt amortization has a variable structure that depends on the execution of the acquisition program.

Also considered positively is the company proven access to international and local bond and equity markets, uncommitted credit lines of approximately USD1.16 billion and a high level of non-strategic assets listed companies, which make up Grupo Sura's investment portfolio, with an estimated value of USD500 million versus gross debt of USD835 million. In Fitch's view, under a stress scenario, Grupo Sura could generate liquidity by accessing the credit markets, executing joint ventures with strategic partners, and disposing of non-strategic assets.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating actions:

Grupo Sura

--Long-term IDR upgraded to 'BBB' from 'BBB-';

--Long-term local currency IDR upgraded to 'BBB' from 'BBB-';

--COP250 billion local unsecured bonds due 2019-2049 affirmed at 'AAA(Col)';

--Local bond and commercial paper program, for a total combined amount of COP1.3 trillion affirmed at 'AAA(col)'/'F1+(col)'.

Gruposura Finance

--USD300 million senior unsecured bonds due 2021 upgraded to 'BBB' from 'BBB-'.

The Rating Outlook is Stable.

Additional information is available at '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=999820

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999820

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Jose Vertiz
Director
+1-212-908-0641
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Jorge Yanes
Director
+571-326-9999 Ext. 1170
or
Committee Chairperson
Joseph Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Jose Vertiz
Director
+1-212-908-0641
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Jorge Yanes
Director
+571-326-9999 Ext. 1170
or
Committee Chairperson
Joseph Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com