NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded Maestro Peru S.A.'s (Maestro) ratings as follows:
--Foreign currency Issuer Default Rating (IDR) to 'B' from 'B+';
--Local currency IDR to 'B' from 'B+';
--Senior unsecured notes to 'B/RR4' from 'BB-/RR3'.
The Rating Outlook remains Negative.
The ratings downgrade reflects the deterioration in Maestro's credit metrics. The company's weak operational results and negative free cash flow (FCF) trend during the last 12-month period (LTM) ended June 30, 2014 has resulted in Maestro's total adjusted debt-to-EBITDAR consistently above 5x, together with low liquidity levels at June 30, 2014. The Negative Outlook reflects credit concerns regarding the company's capacity to reverse the negative trend in margins, leverage, and liquidity during the next 12-month.
The ratings incorporate Maestro's leading market position, high leverage and low liquidity. The ratings also consider the sensitivity of the construction and home improvements industry to economic cycles. The 'B/RR4' rating of the company's unsecured public debt reflects average recovery prospects in the event of a default.
KEY RATING DRIVERS
Maestro's liquidity is viewed as weak considering its cash level relative to its short-term debt, declining interest coverage, and the FCF generation trend. The company's cash and equivalents were USD5.8 million while its short-term debt was USD16.4 million at June 30, 2014. Maestro's interest coverage ratio, measured as EBITDAR/(interest expenses plus rents), has declined reaching 2.5x, 1.8x, and 1.4x during 2012, 2013, and LTM June 2014, respectively. Maestro generated cash flow from operations (CFFO) of USD16.2 million during the LTM ended June 30, 2014. FCF was negative USD5.8 million after capital expenditures (capex) of USD22 million. The FCF calculation considers CFFO minus capex. The company has adjusted down its 2014 capex plan, and no store openings are scheduled during this year. During 2015, Maestro plans to resume new openings but it will depend on the sales of non-core fixed assets.
During 2013 and LTM June 2014, the company's EBITDA margins declined to 8.2% and 7.5%, respectively, from a stable 9% in 2011 and 2012. EBITDAR margins which considered rentals - USD8.3 million in LTM June 2014 and USD7.3 million in June 2013 - were 9.0% and 9.5%, respectively. Maestro's revenues of USD543 million in 2013 increased 15.4% compared to 2012, but for LTM June 2014 remained around USD544 million. Lower sales growth and higher operational expenses as seven new stores were opened during 2013 explained the margin reductions. Due to the economic slowdown and cannibalism from new stores, same store sales (SSS) fell 2.9% during the first semester of 2014.
Adjusted Leverage Above Expectations:
Maestro's gross adjusted leverage, measured by total adjusted debt divided by EBITDAR, and net adjusted leverage ratios were 5.9x and 5.8x for LTM June 2014, respectively. This compared negatively with gross adjusted leverage levels of 4.5x and 5.5x in December 2012 and December 2013, respectively. The company's total adjusted debt was approximately USD290 million at the end of June 2014. This debt includes USD232 million in on-balance-sheet debt, mostly compounded by the USD200 million unsecured notes issued in September 2012. Total off-balance-sheet debt of USD58 million is calculated by adjusting by 7x the company's rental payments of USD8.3 million during LTM June 2014.
Covenants Restrict Additional Indebtedness but Carveouts:
The company's USD200 million bond indenture considers a limit on additional indebtedness of a consolidated debt-to-consolidated EBITDA ratio no greater than 4.5x prior to year two after issuance, 4x in year two and prior to year three, and 3.5x thereafter. The indenture also includes carveouts that allow for additional new debt - up to USD40 million - despite being above the maximum financial leverage covenant. As of June 2014 the company's financial leverage ratio was 5.3x, above the covenant maximum limit, and the additional new debt incurred was S/.51.8 million (USD20 million) below the maximum allowed for additional indebtedness (USD40 million).
Market Position Incorporated:
The ratings factor in Maestro's business position as a leading local player in the Peruvian retail home improvement sector. Maestro is one of the two largest modern home improvement retailers in Peru. The company has an estimated market share of 40% of the modern retail channel. Maestro maintains an established and recognized brand and is well positioned as a low-price specialist. Maestro's ratings positively consider the solid medium-term fundamentals of Peru's home improvement industry reflected in increasing purchasing power of households and the industry's low penetration.
Negative Rating Action: A combination of the following would result in a rating downgrade: further deterioration of the company's gross adjusted leverage and interest coverage due to poor operational performance.
Positive Rating Action: A combination of the following would result in revising the Negative Outlook and affirming the ratings: stable operational performance reflecting improvement in SSS combined with a balance between capex, liquidity and capital structure resulting in the company's total gross adjusted leverage in the range of 5-5.5x and interest coverage in the range of 1.5x to 1.75x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage