Fitch Rates Grupo GICSA's IDR & Proposed Sr. Unsecured Notes 'BB-'

NEW YORK--()--Fitch Ratings has assigned the following ratings to Grupo GICSA S.A.B. de C.V. (Grupo GICSA):

--Long-Term Issuer Default Rating (IDR) 'BB-';

--Local Currency IDR 'BB-';

--Proposed senior unsecured notes 'BB-(EXP)'.

The Rating Outlook is Stable.

The total amount of the proposed unsecured notes issuance is expected to be around USD300 million. Proceeds from the proposed issuance will be used primarily to fund the company's capital expenditures (capex) plan.

The ratings factor in Grupo GICSA's sound property portfolio profile, solid market position, stable and high operational margins, aggressive growth strategy, liquidity profile and net leverage metrics on a pro forma basis, post the proposed debt issuance; and, business fundamentals driving Mexico's retail and office real estate segments. Positively incorporated in the ratings is the company's long track record as a leading developer, and ability to pre-fund approximately 83% of its 2016-2017 capex plan.

The ratings negatively incorporate Grupo GICSA's relatively high levels of targeted 2016-2019 capex plan compared to its cash flow generation; the absence of a material unencumbered asset pool during the first stage of its capex plan; and, the subordination risk for the proposed unsecured bond issuance. GICSA's ability to service its debt at the holding level will depend on cash flows it receives from its subsidiaries. The proposed bond structure does not include upstream guarantees from any of GICSA's subsidiaries.

The Stable Outlook reflects Fitch's expectation that the company will successfully execute its 2016-2018 capex plan while stabilizing its consolidated net leverage at around 4x and reaching consolidated interest coverage around 3.25x toward 2018, while building an unencumbered pool of assets over the medium term.

KEY RATING DRIVERS

Leading Developer in Mexico, Focus in Organic Growth:

The ratings factor in Grupo GICSA's business strategy of organic growth and a business model that incorporates strategic partners through joint ventures at the individual property level. No acquisition activity is considered in the ratings base case for the company during the next few years. GICSA has operated for more than 20 years in the real estate business in Mexico. It owns 13 investment stabilized properties consisting of seven shopping centers, four mixed-use projects (which include in the aggregate four shopping centers, four corporate offices buildings and one hotel) and two corporate office buildings with a total GLA as of March 31, 2016 of 619 thousand square meters and a proportional GLA of 391 thousand square meters. The company's total GLA is comprised of 50% for shopping centers, 7% for corporate offices, and 43% for mixed-use projects.

High and Stable Margins, Manageable FX Risk:

Fitch views the company's margins as high and sustainable given the characteristics of its lease portfolio, which provides it with a stable base of fixed-rent income, tenant reimbursements, high renewal rates; and adequate lease expirations. Grupo GICSA reached consolidated EBITDA levels and EBITDA margin of MXN2.6 billion and 74.8%, respectively, during the last 12 months ended in March 31, 2016 (LTM March 2016). The ratings incorporate the expectation that the company's consolidated EBITDA margin will remain stable around 75% during 2016-2018. In addition, Grupo GICSA's revenue structure offers a partial protection against FX risk as approximately 35% of the company's rental revenue is U.S. dollar denominated. The company's lease contracts in the office segment are mostly denominated in U.S. dollars while those related to the retail segment are denominated in local currency. Both segments include inflation adjustment mechanisms (U.S. and Mexico inflation rate).

Adequate Rental Income Risk Profile:

Grupo GICSA has an adequate profile in terms of occupancy, rent trend, lease duration, and renewals. The company's retail and office portfolios have reached stable-to-improving trend in its occupancy levels. The company's retail and office portfolios reached levels of 91% and 87%, respectively, during the first quarter of 2016 (1Q2016). Grupo GICSA's consolidated portfolio total occupancy was around 90% in 1Q2016. Lease renewals have trended flat-to-positive during recent years. In the company's retail portfolio, the average monthly rent was MXN231, MXN246, and MXN259 during 2013, 2014, and 2015, respectively. In the office portfolio, the average monthly rent was MXN273, MXN362 and MXN431 during 2013, 2014, and 2015, respectively. The company's total property portfolio includes good retention rates with historical levels above 80% during 2013-2015.

Property Concentration and Lease Expiration Schedule Incorporated:

Grupo GICSA's portfolio presents some property concentration as it is composed of 13 properties and the top-five properties representing approximately 70% of the company's total consolidated EBITDA. This situation is expected to improve with the execution of the company's capex plan by adding 15 new properties to the portfolio by 2019, with the top-five properties representing approximately 35% of the company's total consolidated EBITDA at that time. In addition, the company's lease portfolio has adequate lease expiration dates in line with the Mexican market standards. About 17.6%, 20%, and 17.7% of Grupo GICSA's rental income contracts expired during 2016, 2017, and 2018, respectively.

Aggressive Capex Plan, 2016-2017 Investment Requirements Covered:

The company maintains an aggressive business growth targeting to invest approximately MXN20 billion during 2016-2019 and expand its total GLA from 619 thousand square meters (sm2) in March 2016 to approximately 1.3 million sm2 in 2019. Grupo GICSA has 15 projects under development, six of which are expected to be mixed-use projects that will combine shopping centers and corporate office buildings, and five of which are expected to be stand-alone shopping centers.

The company plans to fund its capex plan with a combination of equity, debt and own cash flow generation. Grupo GICSA's financial strategy to execute its business growth included an already executed MXN6.5 billion IPO in 2015. As of March 31, 2016, the company has a cash position of MXN6.6 billion (USD357 million). Considering the company's current liquidity and proceeds from the proposed USD300 million bond issuance, Grupo GICSA has prefunded approximately 83% of its 2016-2017 capex plan, which is the most intense period.

Adequate Interest Coverage Service, Improvement in Debt Maturity Profile Expected:

The company's liquidity post-issuance is viewed as manageable considering consolidated forecasted levels of liquidity as well as interest coverage ratios. Consolidated cash position is expected to be at levels around MXN8.5 billion and MXN2 billion by the end of 2016 and 2017, respectively. The consolidated interest coverage ratio is estimated at 3.3x during 2016-2017. At this point the company's financial strategy does not consider the use of committed credit lines.

GICSA's financial strategy includes the rollover of secured indebtedness. As of March 31, 2016 the company has a debt payment schedule with important debt principal payment coming during the next years. Grupo GICSA's short-term debt was MXN3.4 billion, and it also has MXN4.4 billion due in 2018. Fitch expects the company's short-term debt to end 2016 at a level below MXN1 billion, while the refinancing of its debt due in 2018 should be completed during the second half of 2017.

Moderate Net Leverage, Absence of Unencumbered Assets Negatively Factored:

As of March 31, 2016, the company's total debt was MXN14 billion. It includes approximately MXN11 billion of secured debt at the operating properties level, and the remaining MXN3 billion was unsecured debt issued in the local market at the holding company level. The company's consolidated net leverage (net debt/EBITDA ratio) was 2.8x for LTM March 2016. The company's net leverage is expected to reach its peak by the end of 2017 at around 4.5x and start declining to levels around 4x by the end of 2018 as the company's capex plan is executed and cash flow generation from new projects increase.

The company's consolidated portfolio value was MXN38 billion resulting in a LTV ratio (Net debt/ Investment Properties ratio) of 20%. Fitch expects the company to manage its LTV ratio in the 30% to 40% range during 2016-2018. Currently the company's property portfolio is 100% encumbered. The absence of a material level of unencumbered asset pool in Grupo GICSA's portfolio is not expected to materially change during 2016-2017 and it has been negatively incorporated in the ratings.

KEY ASSUMPTIONS

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

--Consolidated EBITDA trending to levels around MXN4.1 billion by the end of 2017;

--EBITDA margin for 2016 - 2018 around 75%;

--Occupancy levels around 91% during 2016-2018;

--Total consolidated net leverage around 4.5x and 4x by the end of Dec. 31, 2017 and Dec. 31, 2018, respectively;

--No dividend payments during 2016-2019;

--Consolidated Interest coverage (EBITDA/gross interest expenses) around 3.3x during 2016-2017;

--Secured debt /total debt ratio consistently below 60% during 2016-2017;

--Total liquidity, measured as total unrestricted cash plus unused committed credit lines, consistently around MXN2 billion by the end 2017;

--No material level of unencumbered assets during 2016-2017

RATING SENSITIVITIES

The following factors may have a positive impact on Grupo GICSA's ratings:

--Consistent execution of anticipated business and financial strategy during 2016-2017;

--Net leverage consistently at or below 4x post 2016-2017 capex execution;

--Consolidated EBITDA trending to levels consistently around MXN4.5 billion by mid-2018.

--Significant improvement in the company's unencumbered asset pool, above 50% of total portfolio.

--Consistent strengthening in the consolidated liquidity ratio above 1x.

The following factors may have a negative impact on Grupo GICSA's ratings:

--Net leverage consistently above 5x after 2016;

--Significant deterioration in EBITDA margin and occupancy below expected levels;

--Increase in the secured debt / total debt ratio above expected levels;

--Fitch's expectation of a sustained liquidity shortfall.

LIQUIDITY

Liquidity is adequate. The company's consolidated cash position is expected to be at levels around MXN8.5 billion and MXN2 billion by the end of 2016 and 2017, respectively. The consolidated interest coverage ratio is estimated at 3.3x during 2016-2017. The company's financial strategy does not consider the use of committed credit lines.

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

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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
Javier Rios
Associate Director
+52 81 8399 9144
or
Committee Chairperson
Sergio Rodriguez
Senior Director
+52-81-8399 9100
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
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
Javier Rios
Associate Director
+52 81 8399 9144
or
Committee Chairperson
Sergio Rodriguez
Senior Director
+52-81-8399 9100
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com