Fitch Rates Liverpool's USD500MM Senior Notes 'BBB+'

MEXICO CITY--()--Fitch Ratings has assigned a 'BBB+' rating to El Puerto de Liverpool, S.A.B. de C.V.'s (Liverpool) USD500 million senior unsecured notes due 2026. The notes will be guaranteed by its subsidiary Distribuidora Liverpool, S.A. de C.V and will rank pari passu with all of Liverpool's and its subsidiary unsecured and unsubordinated indebtedness. Net proceeds from the issuance are expected to be used for general corporate purposes, including capital expenditures and a portion of the purchase price of Liverpool's recent acquisitions. A full list of the company's ratings is provided at the end of this release.

In Fitch's view, Liverpool's recent acquisitions will strengthen the company's business position by expanding its target market and geographic footprint, positioning it as a relevant player within the Latin American region in terms of scale and purchasing power. Fitch revised Liverpool's Rating Outlook to Stable from Positive on Aug. 11, 2016, reflecting Fitch's view that a rating upgrade for Liverpool will be unlikely in the next 12 months as the company will increase its debt levels enough to fund the acquisition of Suburbia and a percentage of Ripley Corp. S.A.'s (Ripley) equity. Fitch believes these agreements will not have an impact on Liverpool's 'BBB+' rating given its solid balance sheet and current low leverage.

The addition of Suburbia to Liverpool's portfolio should strengthen its business position in the medium- to low-income segment, create opportunities to capture synergies, and open the possibility to expand its financial business to Suburbia. On Aug. 10, 2016, Liverpool announced it reached an agreement with Wal-Mart de Mexico, S.A.B. de C.V. (Walmex) to acquire 100% of Suburbia for MXN19 billion. The transaction is expected to close during the first quarter of 2017 and needs approval by the antitrust commission. The company plans to fund the MXN19 billion-transaction with a combination of cash and debt and Fitch does not foresees any material acquisition until leverage returns to historical levels.

In July 2016, Liverpool entered into an agreement to make a public bid for at least 25.5% and up to 100% of the traded shares of Ripley. The value to be paid could range between USD310 million and USD580 million, depending on the percentage of the public shareholders' acceptance. Fitch's base case takes into account that Liverpool will get a minority stake of Ripley and will account for this investment by the equity method.

KEY RATING DRIVERS

Liverpool's ratings reflect the company's leading business position in Mexico, geographic diversification, and multiple store formats, all of which support its consistently positive operating cash flow generation and ample financial flexibility. In addition, the consumer finance division and the real estate portfolio strengthens its existing retail operations. For the first six months of 2016, sales through own credit cards accounted for approximately 42.6% of consolidated revenue and Liverpool owns approximately 83% of its retail space.

Strong Market Position

Liverpool is the leader in the middle-, middle-high and high-income segment of department stores in Mexico. During the last 12 months (LTM) ended June 30, 2016, the company's retail revenues reached MXN83.5 billion, 13.6% above 2015. As of June 2016, the company operates 113 stores across 57 cities throughout Mexico: 80 under the name of Liverpool, 29 Fabricas de Francia, and four stores in the format Liverpool Duty Free. Around 80% of total units are owned by Liverpool.

The company also has 25 shopping malls operating in 16 cities and owns a non-controlling 50% stake in Regal Forest Holding Co., which has 14 different store brands selling consumer durable products in 20 countries around Central and South America and the Caribbean. Regal Forest investment is recorded under the equity method of accounting.

Format and Business Diversification Provides Stable Cash Flow:

Liverpool has a diversified revenue base; for the LTM ended June 2016, 87.3% of total revenues were contributed by its retail segment, 9.7% from its financial services division and 3.1% from real estate. During the first half of 2016, retail total segment revenues grew 13.6% compared to the same period the year before, while same store sales (SSS) grew 9.1%, slightly below the average of 9.2% average for department store growth cited by the Asociacion Nacional de Tiendas de Autoservicio y Departamentales (ANTAD). Fitch believes that the company is well positioned to continue its business strategy given the current demographic and socioeconomic fundamentals in Mexico, with a growing middle class, low inflation rates, higher real wages and higher remittances due to the peso depreciation.

Consumer Credit Division Supports Retail Business

Fitch positively factors into Liverpool ratings the funding of its credit card portfolio which has been historically with internal generated funds and has presented an effective loan portfolio management through the business cycles. During challenging economic times with high unemployment rates, Liverpool has restricted its credit offering and the limits of existing customers' credit lines to avoid excessive portfolio growth and high non-performing loan (NPL) rates. The company has an average NPL index of 3.7% during the last five years and it has not been above 5% of the total gross loan portfolio. As of June 30, 2016, Liverpool had approximately 4.1 million credit card accounts. Its net credit card portfolio of MXN28.7 billion covers its debt by 2.0x and considering Fitch's total pro forma debt related to acquisitions, the same portfolio would cover it by 0.7x.

Recent Acquisitions Pressure Liverpool's Credit Metrics:

Fitch believes Liverpool's credit metrics, after the acquisition of Suburbia and investment in Ripley, will recover their historical levels in the medium term given its retail expertise and consistent operating and financial track record. As of June 2016, Liverpool's adjusted leverage measured as total adjusted debt/EBITDAR was 1.2x. According to Fitch's estimations, debt is expected to rise in 2017 to nearly MXN40 billion from the MXN14.5 billion in June 2016, resulting in adjusted leverage of 2.6x in 2017, after the Suburbia and Ripley's acquisitions.

FX Exposure Partially Mitigated

Fitch estimates that around half of Liverpool's merchandise is exposed to exchange rates. Merchandise exposure is mitigated by re-pricing some articles after inventory restocking; a proportion of exchange rate movements are absorbed by the final customer. The company currently has USD300 million of senior notes due in 2024. This USD-denominated debt has hedges in place that cover interest and principal, which are currently below the market spot rate. The upcoming USD500 million senior notes to be issued will also be hedged, covering foreign exchange rates fluctuations.

Adequate Liquidity & Debt Maturity Schedule

The company has good liquidity backed by its cash on hand and cash flow generation; also, the current loan portfolio covered total debt as of June 2016 by about 1.4x. Liverpool's next debt maturity is a local bond for MXN2.1 billion due on March 2017. Liverpool has good access to domestic and international capital markets if needed, which further strengthens its financial flexibility. In addition, the company's large portfolio of owned stores and shopping malls provides solvency through an important base of unencumbered assets.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Liverpool include the following:

--Liverpool gets a 47% stake of Ripley in 2016 with a combination of cash and debt.

--Consolidation with Suburbia takes place in 2017; the transaction is funded 100% with debt.

--Revenue growth in the mid-single digits during 2018-2019.

--EBITDA margin between 15%-16%.

--Average capex around 7.2% of revenue in 2016-2019.

--Dividends in line with company policy of 15% of previous year's net income.

--Adjusted debt/EBITDAR ratio to remain below 3.0x.

RATING SENSITIVITIES

Factors that individually, or collectively, could result in a negative rating action include: an expansion strategy financed primarily with debt, a sustained adjusted leverage ratio (gross adjusted debt/EBITDAR) above 3.0x, consistently negative free cash flow (FCF) below Fitch's expectations, a substantial deterioration in non-performing receivables (more than 90 days), and lower profitability margins.

Factors that individually, or collectively, could result in a positive rating action include: a successful integration with Suburbia, strong operating cash generation, a strengthening in the company's credit profile through a funds from operations (FFO)-adjusted leverage (adjusted debt/FFO) below 2.0x and adjusted debt/EBITDAR ratio below 1.5x, consistently positive FCF throughout the business cycle, and geographic diversification.

FULL LIST OF RATING ACTIONS

Fitch currently rates Liverpool as follows:

--Long-Term Foreign and Local Currency IDRs 'BBB+', Stable Outlook;

--Long-Term National rating 'AAA(mex)', Stable Outlook;

--Short-Term National rating 'F1+(mex)';

--USD300 million senior notes due 2024 'BBB+';

--Long-term Certificados Bursatiles issuances (LIVEPOL 08,10,10U,12,12-2) 'AAA(mex)';

--Short-term Certificados Bursatiles program for up to MXN5 billion 'F1+(mex)'.

Date of Relevant Rating Committee: Aug. 11, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

National Scale Ratings Criteria (pub. 30 Oct 2013)

https://www.fitchratings.com/site/re/720082

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012334

Endorsement Policy

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Contacts

Fitch Ratings
Primary Analyst
Maria Pia Medrano
Associate Director
+52 55 5955 1600 Ext. 2115
Fitch Mexico S.A. de C.V.
Blvd. Manuel Avila Camacho 88, Piso 10
Lomas de Chapultepec, Ciudad de Mexico
or
Secondary Analyst
Johnny DaSilva
Director
+1-212-908-0367
or
Committee Chairperson
Sergio Rodriguez, CFA
Senior Director
+52 81 8399 9100
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Maria Pia Medrano
Associate Director
+52 55 5955 1600 Ext. 2115
Fitch Mexico S.A. de C.V.
Blvd. Manuel Avila Camacho 88, Piso 10
Lomas de Chapultepec, Ciudad de Mexico
or
Secondary Analyst
Johnny DaSilva
Director
+1-212-908-0367
or
Committee Chairperson
Sergio Rodriguez, CFA
Senior Director
+52 81 8399 9100
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com