Fitch Downgrades Famsa's IDRs to 'B'; Outlook Revised to Negative

MEXICO CITY--()--Fitch Ratings has downgraded Grupo Famsa S.A.B. de C.V.'s (Famsa) Local and Foreign Currency Long-Term Issuer Default Rating (IDR) to 'B' from 'B+' as well as the long-term National Scale Rating to 'BBB-(mex)' from 'BBB(mex)'. The Rating Outlook has been revised to Negative from Stable. In addition, Fitch has affirmed Famsa's national short-term rating at 'F3(mex)'. A full list of rating actions follows at the end of this press release.

The downgrade follows the company's announcement that it has provisioned an additional MXN5.09 billion to cover overdue receivables and wrote off MXN6.78 billion of bad credits due to Famsa's unawareness of its account receivables real aging.

The downgrade also reflects Famsa's weaknesses in appropriate internal controlling procedures within the company's operations and Fitch's reduced confidence in Famsa's receivables credit quality. Famsa's credit metrics have also been affected after the new provision registration, as of December 2015 the gross leverage ratio (debt/EBITDA) excluding banking deposits went to 5.5x from the previous 5.1x and the net leverage ratio excluding deposits was 4.1x from the previous 3.9x.

Although the company's main shareholder, Humberto Garza Gonzalez personally and together with some of its companies, provided a guarantee to cover those pending accounts up to MXN5.091 billion in the next 18 months, Fitch is uncertain about to what extent Famsa's performance may affect shareholder support over the longer term.

The Negative Outlook considers Fitch's view on the company's effectiveness of establishing new internal controlling actions which impacts corporate governance and heightens higher operational risks, as well as on Famsa's success on the materialization of the collection of those accounts or the execution of the guarantee to cover those payments.

Restated financial statements as of March 2016 including the auditor's recent adjustments have not been published yet, so this press release only contains financial figures as of December 2015.

KEY RATING DRIVERS

The rating continues to reflect positive aspects of Famsa, including its market position within the Mexican retail sector, its 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.

Good Performance in Mexican Retail Sales:

Following the consumption recovery in the country for 2015, Famsa presented a consolidated revenues increase of 14.1% compared to 2014. Famsa's main challenge is to retain and increase market share in a market where larger retail chains such as Coppel and Elektra, also target the low-income segment of the population.

Banco Famsa Undergoing Operational Consolidation:

Famsa's financial division, Banco Famsa (BAF), has good brand equity and competitive position in consumer finance, mainly in northeastern Mexico. Its financial performance is constrained by its high credit costs which limited the bank's ability to be more profitable and still high loan-impairment charges. However, BAF is addressing it and still shows a reasonable capital adequacy. During 2014 and 2015, Famsa made a total of MXN400 million capital increase in BAF.

BAF continues to operate with 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.

U.S. Operations EBITDA-Positive:

The last two years have been positive for Famsa's U.S. operations. Fiscal year end (FYE) 2015 EBITDA for the U.S. operations was MXN93 million, an increase compared to MXN88 million in 2014. Most of that increase is related to the peso devaluation and to a lesser extent to increases in personal loans and Famsa to Famsa revenues. Same store sales for the U.S. operations kept growing for 2015 and the company expects to continue this trend in the near future.

RATING SENSITIVITIES

Future developments that may individually or collectively lead to a negative rating action include: failing in the execution of the guarantee to cover the written off credits, continuing deficient internal operating controls, deterioration in BAF's creditworthiness beyond FAMSA's ability to lend support, consolidated gross leverage (excluding bank deposits) consistently above 5.5x, lower EBITDA generation by FAMSA USA as well as by further deterioration in the quality of the loan portfolio.

No positive rating actions are currently contemplated over the near term. A revision of the Rating Outlook to Stable can be contemplated if Famsa is successful in establishing internal controls to avoid future similar events in conjunction with the successful completion of the collection of receivables or the materialization of the controlling shareholder guarantee.

LIQUIDITY

Liquidity Should Be Adequate: For year-end 2015, Famsa's short-term debt (excluding banking deposits) was MXN4.2 billion, with non-restricted cash holdings of about MXN2.2 billion, so some refinancing risk could persist. However, the company's short-term receivables portfolio of MXN20.9 billion should also support the company's liquidity.

Short-term debt for Famsa is mostly made up of short-term Cebures programs and bank loans with several institutions, reducing refinancing risk within the near term.

Famsa is exposed to currency variations. As of Dec. 31, 2015, Famsa's retail division debt was 57% dollar-denominated and it didn't have hedging instruments. After the payment of the dollar denominated commercial paper in January 2016, that percentage decreased to 52% of total debt. Nevertheless, currency exposure is partially mitigated by cash flows from the U.S. operations.

KEY ASSUMPTIONS

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

--Consolidated revenues grow in average 5% annually during 2016-2019;

--EBITDA margin of 10.6% during 2016-2019;

--EBITDA from the U.S. division continues to be positive;

--Average funds from operations (FFO) of MXN2.9 billion per year for 2016-2019;

--Consolidated debt (excluding bank deposits) to be around MXN7 billion in 2016-2019.

--Average capex of MXN325 million during 2016-2019.

--No Dividends payment for 2016-2019.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings:

--Foreign Currency Long-Term IDR to 'B' from 'B+';

--Local Currency Long-Term IDR to 'B' from 'B+';

--Long-term national scale rating to 'BBB-(mex) from 'BBB(mex)';

--USD250 million senior unsecured notes due in 2020 to 'B/RR4' from 'B+/RR4';

--MXN1 billion Certificados Bursatiles issuance due 2017 to 'BBB-(mex)' from 'BBB(mex)'.

The Rating Outlook is Negative.

The 'RR4' rating reflects average recovery prospects in case of default between 30% and 50% of principal.

Fitch has affirmed the following ratings:

--Short-term national scale rating at 'F3(mex)';

--MXN500 million short-term Certificados Bursatiles program at 'F3(mex)'.

--MXN500 million short-term Certificados Bursatiles program at 'F3(mex)'.

Additional information is available on 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

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005358

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005358

Endorsement Policy

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

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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
+1-212-612-0367
or
Committee Chairperson
Alberto Moreno
Senior Director
+52 81 8399 9100
Date of Relevant Rating Committee: May 30, 2016.
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
+1-212-612-0367
or
Committee Chairperson
Alberto Moreno
Senior Director
+52 81 8399 9100
Date of Relevant Rating Committee: May 30, 2016.
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com