NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded General Shopping Brasil SA's (GSB) Long-Term Foreign and Local-Currency Issuer Default Ratings (IDRs) to 'CC' from 'RD' and National Scale rating to 'CC(bra)' from 'RD(bra)'. A full list of ratings actions follows at the end of this release.
The rating actions reflect Fitch's reassessment of GSB's IDRs and issuance debt ratings incorporating the company's credit quality following its recently executed debt exchange offer.
Fitch believes GSB's main challenge is to improve its unsustainable capital structure and weak liquidity. On the operational side, the company's efforts are oriented towards improving its tenant mix and maintaining stable operational performance. On the financial side, during 2015 - 2016 GSB has pursued several strategies to preserve liquidity, reduce financial leverage and lower FX exposure. The appreciation of the Brazilian real during 2016 is a positive factor for the company's capacity to service its debt, as GSB's cash flow generation is 100% in local currency and its debt is approximately 55% denominated in U.S. currency.
KEY RATING DRIVERS
Unclear Strategy on Capital Structure
Despite the company's efforts to reduce its financial leverage during 2015 - 2016, GSB's capital structure remains unsustainable due to limited capacity to service its debt. During the last-12-months ended in June 2016, GSB launched a debt exchange offer for its perpetual notes, completed an equity injection of around BRL57 million and launched a debt exchange offering for its subordinated perpetual notes. During the same period GSB decided to defer the interest payments corresponding to its subordinated perpetual notes and executed several asset sale transactions resulting in net process for approximately BRL 70 million.
Limited Deleverage from Recent Debt Exchange
Fitch continues to see GSB's financial leverage as high and capacity to service its debt as limited. The company's total debt is BRL1.8 billion - on a proforma basis - as of June 30, 2016. It consists of BRL614 million in real estate credit bills, BRL180 million in secured loans and financing, BRL534 million in perpetual notes, BRL427 million in subordinated perpetual notes, BRL29 million in new secured notes and BRL 26 million in unsecured loans. The company's net leverage was 9.6x as of June 30, 2016. When considering the 50% equity credit, GSB's net leverage is estimated at 8.1x as of June 30, 2016. Fitch's rating case incorporates the expectation GSB's net leverage ratio around 9x during 2016 - 2017, it assumes the company will require to take additional debt to preserve liquidity.
Resilient Operational Performance
Despite the weakening in some operational indicators, GSB operational performance has remained relatively stable during 2015 - 2016. The company's same store sales (SSS) and same store rent (SSR) has weakened during the last-12-month period ended in June 2016. GSB's SSS declined to levels in the low single digits during the first half of 2016, while its levels of SSR were in the 6% to 7% range during the same period. Fitch expects GSB to maintain EBITDA margins of around 65%, occupancy levels around 94%, and total annual revenues per square meter increasing at an annual growth rate in the 7% to 8% range during 2016 - 2017. Fitch expects GSB's annual revenues in the BRL270 million to BRL 286 million during this period.
Quality Assets and Subordination Incorporated in Debt Recovery
As of June 30, 2016, GSB's total assets were valued at an estimated BRL2.8 billion, with encumbered and unencumbered assets representing approximately 84% and 16%, respectively, of the total assets value. Fitch's expectation in the recovery prospects on GSB's notes reflect the view that an ongoing concern scenario is more likely to occur - versus a liquidation scenario - if GSB's financial distress results in a debt restructuring process. The Recovery Rating (RR) of 'RR4' for the USD250 million perpetual notes reflects the average recovery prospects (the 31% to 50% range) in an event of default. The 'RR5' for the USD150 million subordinated perpetual notes reflects below average recovery prospects of approximately 11% - 30%. The Recovery Rating (RR) of 'RR3' for the USD8.9 million new secured notes reflects good recovery prospects (the 51% to 70% range) in an event of default. GSB's new secured notes were assessed as benefiting from higher recovery prospects but reduced to 'RR3' because of Brazil's specific recovery rating caps.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for GSB's ratings include:
--The company's capacity to cover cash interest payments and cash taxes is very limited, below 1x, during 2016 - 2018;
--The company continues refinancing its debt due during 2016 - 2018, and increasing some revolving debt to maintain liquidity;
--EBITDA margin around 65% during 2016 - 2018;
--The company continues deferring interest payments on the subordinated perpetual notes during 2016 - 2018;
--No capital expenditures during 2H2016 and 2017 - 2018.
RATING SENSITIVITIES
The following factors may have a negative impact on GSB's ratings:
--Further deterioration of GSB's liquidity position;
--Execution of a distressed debt exchange;
--Defaults on scheduled amortization/interest payments and/or formally filing for bankruptcy protection.
The following factors may have a positive impact on GSB's ratings:
--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
Weak Liquidity
GSB maintains limited capacity to cover interest expenses and taxes with its cash flow from operations. The company will have to use current liquidity or incur in additional debt to cover the gap between cash interest/taxes payments and cash flow generation. GSB's liquidity position was BRL125 million and its short-term debt was BRL108 million as of June 30, 2016. GSB's 2016 - 2017 annual cash flow generation, measured as EBITDA, is estimated at around BRL180 million, while the company's annual average cash interest and cash taxes payments are estimated at BRL195 million and BRL 50 million, respectively, during the same period. GSB is anticipated to continue deferring the interest expenses on its 12% subordinated perpetual notes. Fitch estimates GSB's cash flow from operations during the next 12 months ended in June 30, 2017 to be negative around BRL60 million. Fitch forecasts GSB's 2016 FFO interest coverage ratio at 0.6x.
Low Unencumbered Pool of Assets
Fitch views the company's unencumbered pool of assets as low relative to its unsecured debt, which limits GSB's financial flexibility. The company's total assets value is estimated at BRL2.8 billion as of June 30, 2016. Encumbered and Unencumbered assets value were BRL2.4 billion and BRL439 million, respectively, as of June 30, 2016. The company's total proforma total debt is BRL1.8 billion, resulting in a consolidated loan-to-value (LTV) of 63%. The company's unencumbered asset to unsecured debt ratio is estimated at 0.4x as of June 30, 2016.
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
General Shopping Brasil S.A. (GSB)
--Long-Term Foreign Currency IDR upgraded to 'CC' from 'RD';
--Long-Term Local Currency IDR upgraded to 'CC' from 'RD';
--National Scale rating upgraded to 'CC(bra)' from 'RD(bra)'.
General Shopping Finance Limited (GSF)
--USD250 million perpetual notes upgraded to 'CC/RR4' from 'C/RR4'.
General Shopping Investment Limited (GSI)
--USD150 million subordinated perpetual notes affirmed at 'C/RR5'.
Fitch has also assigned new ratings to the new secured notes issued by GSI through the company's recent bond issuance as follows:
--USD8.9 million of senior secured notes due 2026 rated
'CCC-/RR3'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Distressed Debt Exchange (pub. 08 Jun 2016)
https://www.fitchratings.com/site/re/882737
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012408
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012408
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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