MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings of Grupo Famsa, S.A.B. de C.V. (FAMSA):
--Foreign currency Issuer Default Rating (IDR) at 'B+';
--Local currency IDR at 'B+';
--Long-term national scale rating at 'BBB(mex)';
--Short-term national scale rating at 'F3(mex)';
--USD250 million senior unsecured notes due in 2020 at 'B+/RR4';
--MXN1 billion Certificados Bursatiles issuance due 2016 at 'BBB(mex)';
--MXN1 billion short-term Certificados Bursatiles programs at 'F3(mex)'.
The Rating Outlook is Stable.
FAMSA's ratings reflect its market position in the Mexican retail sector, geographic and product diversification, broadly stable operating cash flow generation by the retail operation, as well as an expectation of a gradual improvement in leverage. On the other hand, the ratings are constrained by historically low growth in retail sales and a linkage with its banking subsidiary, Banco Ahorro Famsa (Banco Famsa; or BAF), rated 'BBB(mex)'/Stable Outlook). The 'RR4' rating reflects average recovery prospects in case of default between 30% and 50% of principal.
KEY RATING DRIVERS
Stable Performance in Mexican Retail Sales:
Recently, notwithstanding the weak consumer confidence and expenditure during 2014, Famsa showed basically stable revenues, with a 1.2% drop in consolidated revenues in 2014. EBITDA margins fell 87 basis points, partly due to SG&A increases. Going forward, the firm is trying to capitalize on 4Q'13's acquisition of Montemex, to broaden not just its financial services offer, but its geographic footprint within Mexico. Montemex's addition will help with some cross-selling opportunities for merchandise through catalog and limited-variety displays in Montemex's locations. FAMSA competes directly with larger Mexican retail chains such as Coppel and Elektra, which also target the low-income segment of the population.
Banco Famsa Undergoing Operational Consolidation:
FAMSA's financial division, Banco Famsa (about 45% of FAMSA's total assets), has good brand equity and competitive position in consumer finance, mainly in northeastern Mexico. Its financial performance is constrained by its high loan-impairment charges; however, BAF is addressing it and still shows a reasonable capital adequacy. In addition, BAF continues to operate with a lower cost of funding from a diversified and growing base of customer deposits. BAF also shows organic growth of its loan portfolio, although customers' sensitivity to a weak economic environment continues to be a limiting factor.
Manageable Increase in NPLs:
The increase in non-performing loans (NPLs) for Banco Famsa in 2014 was mostly driven by loan accounting changes, and to a lesser degree, by the economic environment and operational concerns. Starting July 2013, loans originated by Promobien, a payroll lender which is also a subsidiary of FAMSA, were no longer accounted for as part of the loan portfolio, but as collection rights. This caused current loans to decrease far more than NPLs and thus resulted in an increase in the NPL ratio. This ratio, as of December 2014 and including collection rights, was 14.2%, lower than the 15.1% of a year before. Excluding collection rights and as reported by the CNBV banking authority, the percentages are 17.9% and 16.8% for 2014 and 2013.
USA Operations EBITDA-Positive:
Currently, fiscal year end (FYE) 2014 EBITDA for the U.S. operations is MXN88 million, an increase compared to MXN55 million in 2013. Furthermore, the U.S. operation has seen its first same store sales increase in the last five years, which can be attributed to stronger consumer confidence among U.S. consumers, including the subsectors served by Famsa USA in Texas and Illinois. The company is planning on growing the U.S. operation modestly, with just one store opening in 2015.
Leverage Expected to Gradually Decrease:
Fitch expects debt-to-EBITDA (excluding bank deposits) to steadily decline in the short- to medium-term from current levels. Consolidated leverage has increased due to bank capitalization efforts and to finance working capital. Debt-to-EBITDA and net debt-to-EBITDA for 2014 (excluding bank deposits) are at 5x and 3.9x, respectively. Including bank deposits, these ratios are 14.5x and 13.4x for 2014. In December 2014, the company carried out a recapitalization for MXN1.5 billion, of which MXN850 million was used for debt reduction. This compensated for an increase in USD-denominated debt due to the Mexican peso's devaluation against the U.S. dollar. Furthermore, FAMSA has not declared dividends for the last few years and has a limited share repurchase program for up to MXN300 million.
Liquidity Should Be Adequate:
For year-end 2014, FAMSA's debt amounted to MXN7.8 billion and bank deposits totaled MXN14.8 billion. FAMSA's debt is comprised of senior notes, national short- and long-term issuances and bank loans. Short-term debt as of Dec. 31, 2014 was about MXN3.1 billion (pro forma short-term debt after January 2015's commercial paper issuance of MXN2.7 billion), with non-restricted cash holdings of about MXN1.7 billion, so some refinancing risk could persist. Pro forma short-term debt is 93% denominated in pesos and it is mostly made up of short-term Cebures programs and bank loans and is primarily used to finance working capital.
Fitch's key assumptions within the rating case for the issuer include:
-- Consolidated debt (excluding bank deposits) to be around MXN8.5 billion in the medium term.
-- BAF to continue facing pressure on capital adequacy and operational metrics.
-- If necessary, FAMSA will continue to support Banco Famsa.
-- Consolidated EBITDAR to be around MXN2.5 billion in the medium term.
-- EBITDA from the U.S. division to be neutral-to-positive.
-- Non-restricted cash balance will be above MXN1 billion.
Credit quality could be negatively affected by deterioration in BAF's creditworthiness beyond FAMSA's ability to lend support, by consolidated leverage (excluding bank deposits) consistently above 5.5x, by lower EBITDA generation by FAMSA USA that results in higher leverage levels, as well as by deterioration in the quality of the loan portfolio.
Conversely, creditworthiness would benefit from increased EBITDA generation due to improving margins and/or organic growth in sales that consistently outperforms the industry, as well as from lower debt levels resulting from less use of credit lines, factoring, and other short-term debt.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' - May. 28, 2014;
--'National Scale Ratings Criteria' - Oct. 30, 2013;
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' - Nov. 18, 2014.
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
National Scale Ratings Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage