TEXT-S&P affirms Intercorp Peru Ltd 'BB-' rating
Overview -- We expect Bahamas-incorporated holding company Intercorp to continue receiving sufficient flow of dividends to cover its debt service for the next two to three years -- We are affirming our 'BB-' issuer credit rating on Intercorp -- The stable outlook reflects our expectation that the company's current capital and financial flexibility won't significantly change over the next two years Rating Action On Nov. 30, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' issuer credit rating on Intercorp Peru Ltd. (Intercorp; previously known as IFH Peru Ltd.). The outlook is stable. Today's rating affirmation is part of our regular annual review. Rationale The rating affirmation is primarily based on our expectation that Intercorp will continue to receive sufficient dividends in the next two to three years to cover its debt service, comprising mainly of annual interest expense of about $22 million on its $250 million notes due 2019. Our rating on Intercorp continues to reflect its portfolio concentration in Banco Internacional del Peru--Interbank (BBB/Stable/--), Intercorp's largest asset and main cash source, its lack of liquid investments, and its inherently volatile cash flow due to factors that affect its subsidiaries' net income and their exposure to economic cycles and consumer spending. Interbank's good credit quality and the company's majority stake in all of its subsidiaries, which gives it control over their cash and financial policies, partially offset these factors. We assess the company's business risk profile as "weak" and its financial risk profile as "significant." The company's relatively aggressive growth and investment strategy underpins its financial risk profile. However, we consider these factors inherent to the nature of the company's business activities. In addition, the company has a significant exposure to foreign exchange rate risk given that its debt is dollar denominated while it mainly generates cash in Peruvian soles. However, Intercorp's relatively low debt, compared with the value of its portfolio, expected dividends from its subsidiaries, and "adequate" liquidity mitigate this exposure. The company recently completed its corporate restructuring. Intercorp formed InRetail Peru Corp. as a holding of the retail (i.e. supermarkets and pharmacies) and real estate operations. The main driver of the reorganization was to create a more efficient structure to expand Intercorp's retail business, particularly Inkafarma, supermarkets, and the development of new shopping malls. Intercorp controls 71.33% of InRetail. As part of the restructuring InRetail issued a $460 million 144 A/Reg S IPO, including a green shoe option, in October 2012. The IPO was allocated locally and internationally. The free float of InRetail is about 22%. Intercorp Peru Ltd. has shareholdings of 70.6% in InRetail. In our view, the IPO proceeds will allow InRetail to fund its growth and capital requirements independently from Intercorp at least in the next two to three years, which will allow Intercorp to use its resources to fund its other business segments' expansion plans. Nevertheless, we don't expect InRetail to provide dividends to Intercorp during the same period, as it is in an expansion stage. We believe this restructuring will ease Intercorp's leverage levels and increase cash flow generation. The company has also begun to diversify its portfolio by acquiring equity shareholding (that is, 50% plus one share) of two universities--Universidad Tecnologica del Peru S.A.C. and Promotora de La Universidad de Chiclayo S.A.C.--from Grupo IDAT for about $75 million, which Intercorp Peru Ltd. and NG Capital Partners financed. We expect Intercorp to integrate these two universities with those schools it already owns to strengthen its operations in its education segment. Although we don't view Intercorp and its subsidiaries as having a single default risk, when analyzing Intercorp's leverage structure, we monitor the company's stand-alone and group debt, because if any of its subsidiaries become stressed, we believe Intercorp may provide some form of financial assistance. We focus only on the group's corporate debt and Interbank's, given its higher credit quality, and specific regulation and capital requirements. Under our base case scenario, Intercorp would cover its minimal overhead costs, interests, and dividends with cash inflows at about 2x in 2012 and 3x in 2013, and use its excess cash to investments in its subsidiaries. We don't expect the company's debt or financial flexibility to materially change and to finance future acquisition through long-term debt. In addition, we expect that capital infusions and investments in subsidiaries will drop or grow at a slower pace following InRetail's IPO. We expect dividends to Intercorp to be above $120 million throughout the projected period, about 80% of which should come from its financial arm, Intercorp Financial Services (IFS). This amount should be sufficient to cover annual operating costs of less than $10 million, interest payments of about $35 million in 2012 and $28 million in 2013, and dividends of $20 million for 2012 and 2013. Investments are hard to predict due to Intercorp's active merger and acquisition activity, but given the recent IPO of InRetail we believe that the company will carry out moderate investments in other business lines and expand internally. Intercorp is involved in several sectors of the Peruvian economy, including financial services, insurance, supermarkets, retail, and real estate. IFS is the holding company for Interbank and its insurance division, Interseguro, and is Intercorp's main holding by both book value and dividends. InRetail will become the second largest holding by book value. InRetail is comprised of supermarkets (Supermercados Peruanos (SP)), retail pharmacies (Inkafarma), and shopping malls operations, which have significant market shares in Peru with about 33%, 47%, and 18%, respectively. We expect InRetail to use the majority of the IPO proceeds to expand its pharmacy operations, supermarkets, and develop shopping malls over the next few years. Intercorp's other subsidiaries include its Bahamas-based financial institution Inteligo Bank Ltd. (formerly known as BluBank Ltd.) and its financing company Financiera Uno, which includes both a credit card operation and Urbi, a real estate developer that owns InRetail's real estate assets. The Peruvian family Rodriguez Pastor controls Intercorp. Liquidity In our opinion, Intercorp's liquidity is adequate. As of Sept. 30, 2012, Intercorp had $19.4 million in cash. During fiscal 2012, it collected dividends for about $130 million and we expect them to drop to $120 million in 2013. We consider that these will be sufficient to cover operating cost of less than $10 million per year; interest expenses of about $35 million and $28 million in 2012 and 2013, respectively; and relatively fixed dividends of $20 million per year. The size of Intercorp's 2010 and 2011 acquisitions and the recent InRetail's IPO leads us to believe that the group would focus its growth efforts in the next two years mostly organically. Given Intercorp's comfortable debt maturities of about $13 million in 2013 and $12 million in 2014, the company would have more than $50 million in 2013 and 2014 of internally generated cash to expand its businesses. Intercorp should have excess cash available to expand its retail operations because its land acquisitions should be financed at Interproperties' level. Moreover, we factor the following assumptions into our assessment of the company's financial flexibility: -- We believe that Intercorp's cash sources will exceed its uses by 1.2x or more; -- It has relatively good standing in local and international credit markets, as seen in its recent bond issuances; -- It owns a financial institution (Interbank) that provide timely (but limited by regulation) financial assistance, if required; -- Comfortable headroom of covenants compliance, including minimum operating cash flow interest coverage of 2.0x and maximum total debt to net worth of 65%; and -- A six-month funded reserve account under its $250 million notes; and -- Maintenance of liquid assets equivalent to one year of interest expenses. Outlook The outlook is stable, reflecting our expectation that the company's current capital and financial flexibility won't significantly change over the next two years. It also incorporates our expectation that projected dividends in the same period would comfortably cover the company's operating and financial needs. Rating upside is limited in the medium term and would most likely depend on greater diversification of cash flows. We don't believe that this will occur before 2014. We may lower the rating if financial flexibility deteriorates or if leverage significantly increases either at Intercorp's level or at its subsidiaries. This may be a consequence of more aggressive financial policies, especially with regard to its investments and dividends, although we do not consider this scenario probable. Related Criteria And Research -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- 2008 Corporate Ratings Criteria, April 15, 2008 -- Rating Methodology for Investment Holding and Operating Holding Companies, Feb. 5, 2003 Ratings List Ratings Affirmed Intercorp Peru Ltd. Corporate Credit Rating BB-/Stable/-- Senior Secured BB- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.