Fitch Affirms Cencosud's IDR at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Cencosud's (Cencosud) ratings as follows:

--Long-term foreign currency Issuer Default Ratings (IDR) at 'BBB-'

--Local Currency Long-term IDR at 'BBB-';

--USD750 million unsecured notes due in 2021 at 'BBB-';

--USD1.2 billion unsecured notes due in 2023 at 'BBB-;

--USD650 million unsecured notes due in 2025 at 'BBB-;

--USD 350 million unsecured notes due in 2045 at 'BBB-'.

The Rating Outlook for the corporate ratings is Stable.

KEY RATING DRIVERS

Diversified Business Model:

The ratings reflect Cencosud's strong business profile as a multi-format, multi-brand retailer with a solid regional market position and geographic diversification (the company operates in five countries). Cencosud enjoys critical size in the food segment and benefits from important presence in the non-food retail segment (department stores, home improvement and shopping malls with high level of store ownership.) The company's stable EBITDA margin and high level of unencumbered assets related to its real estate segment are also viewed positively. A constraining factor for the ratings is the company's exposure to Argentina's sovereign risk (35% of EBITDA) and the execution of the turnaround of its Brazilian operations.

Deleveraging Expected to Continue:

Cencosud S.A.'s adjusted gross leverage, as measured by total adjusted debt/EBITDAR, was 4.7x as of Dec. 31, 2015 (5x as of FYE14). Excluding financial services, the ratio was at about 4x as of FYE15. Fitch expects the company to reduce its consolidated adjusted gross leverage towards 4x over the next 18 months (towards 3x-3.5x excluding financial services). The company has divested non-core assets for about USD 222 million (real estate, pharmacies) in 1Q16. Fitch anticipates further non-core asset disposals in 2Q16 and 2017. The company is proposing extraordinary dividends of about USD210 million which represents less than 40% of the total estimated value of non-core assets to be divested.

Neutral to Positive FCF:

Fitch expects Cencosud to generate neutral to positive free cash flow generation (FCF) in FYE16 as a result of improved EBITDA margin (efficiencies, lower SG&A, better working capital management) and this despite higher capex. In FYE15, the group generated positive FCF. The company has contemplated capex of USD 2.5 billion over 2016-2019 mainly to strengthen its infrastructure, logistics and IT systems. Fitch assumes capex of USD 500 million in 2016.

Operational Margin Trend Crucial:

Cencosud's main operational challenges are to grow its businesses and improve margins, despite weak consumer confidence. This is a direct result of slow economic growth in Latin America and high inflation in a few markets, such as Brazil, Argentina and Colombia. Fitch expects a slight improvement of the company's EBITDA margin thanks to efficiencies measures but anticipates limited improvement in Cencosud's Brazilian operation due to the difficult competitive environment.

KEY ASSUMPTIONS

--Adjusted EBITDA margin of about 7.4% in FYE16;

--Gross adjusted gross leverage towards 4x in FYE17;

--Gross adjusted leverage-excluding financial services operations towards 3x-3.5x in FYE17;

--Neutral to positive FCF in 2016;

--Fitch does not factor the potential of spinoff shopping malls;

--Exceptional dividend of USD 210 million and capex of USD500 million.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:

--Sustained negative FCF;

--Lease-adjusted gross leverage excluding financial services above 4x;

--Group EBITDA margin consistently below 7%.

Conversely, Fitch may take a positive rating action if a combination of the following factors takes place:

--Lease adjusted gross leverage excluding financial services below 3x;

--Consistently positive FCF generation reflected in FCF margin around 3%-5%;

--EBITDA margin consistently above 8%;

--Decreased exposure to Argentina's sovereign risk.

LIQUIDITY

In 2015, Cencosud made two issuances of international bonds for a total amount USD1 billion and sold 51% of its retail finance business in Chile that strengthened its cash position and reduced its debt in dollars. As of FYE15, the group cash position was USD379 million and short-term investment of USD360 million. The company faces a manageable debt scheduled payments of USD 230 million in 2016 and USD 96 million in 2017 for its non-bank operations. As of Dec. 31, 2015, roughly 74% of consolidated financial debt was denominated in U.S. dollars; 57.2% of the total financial debt was covered using cross currency swaps or other exchange rate hedges. Considering the effect of exchange rate hedging, the company's exposure to the U.S. dollar was 31.7% of total debt as of FYE15.

Summary of Financial Statement Adjustments:

Leases: Fitch has adjusted the debt by adding 7x of yearly operating lease expenses.

One-off costs: Fitch excludes one-off costs in EBITDA

Date of Relevant Rating Committee: April 14, 2016

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002582

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002582

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

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Contacts

Fitch Ratings
Primary Analyst
Johnny Da Silva
Director
+1-212-908-0367
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Tatania Sclabos
+56 9 7453 3728
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Johnny Da Silva
Director
+1-212-908-0367
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Tatania Sclabos
+56 9 7453 3728
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com