TEXT-Fitch affirms Hypermarcas' IDRs at 'BB'; outlook revised to stable

Mon Dec 17, 2012 8:38am EST

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(The following statement was released by the rating agency)

Dec 17 - Fitch Ratings has affirmed the following ratings of Hypermarcas S.A.'s (Hypermarcas):

--Long-term foreign currency Issuer Default Rating (IDR) at 'BB';

--Long-term local currency IDR at 'BB';

--Long-term national scale rating at 'A+(bra)';

--Senior unsecured notes due in 2021 at 'BB';

--Third debentures issuance at 'A+(bra)'.

The Rating Outlook has been revised to Stable from Negative.

The Outlook revision reflects Hypermarcas' improved operating cash flow generation and its ability to deleverage during 2012. Fitch projects that Hypermarcas' net leverage ratio will decline to 3.0x FY12 from 5.1x in 2011.

Hypermarcas' ratings reflect its leading position in the competitive Brazilian market, the strength and diversification of its brands and the resilience of the pharmaceutical and personal care industries to economic conditions. Hypermarcas' management's commitment to maintain a strong liquidity position is also incorporated into the ratings.

STRONG BUSINESS POSITION; DIVERSIFIED PRODUCT PORTFOLIO:

Hypermarcas has one of the largest and most diversified consumer products portfolios in Brazil, with focus on the pharmaceutical, beauty and personal care segments. Hypermarcas' business strategy is to capture synergies through the integration of acquired operations into a single cost platform in terms of packaging, distribution, advertising and marketing. Currently, the company's Pharma segment accounts for 56% of revenues, while its Beauty and Personal Care segment account for the balance of revenues. The significant expansion of Hypermarcas' operations and product portfolio in recent years was achieved primarily through acquisitions. Hypermarcas has carried out 23 acquisitions since 2007, which totaled approximately BRL8.1 billion and were financed through a mix of debt and equity.

OPERATING CASH FLOW IMPROVEMENTS

Hypermarcas successfully recovered its sales to wholesalers, improved working capital terms and integrated several newly acquired assets during 2012, which resulted in an increase in its EBITDA and CFFO. During the last nine months ended on Sept. 30, 2012, Hypermarcas' EBITDA was BRL625,5 million, higher than the EBITDA of BRL534 million, per Fitch's criteria, during full-year 2011. EBITDA margins improved to 22% from 16%. During the LTM, the company's CFFO improved to BRL 899 million from BRL580 million in 2011, while its free cash flow grew to BRL 674 million from BRL 305 million, respectively. The fourth quarter of 2012 should be significantly better than the last quarter of 2011, leading Fitch to estimate that Hypermarcas' EBITDA for 2012 will grow to more than BRL850 million from BRL 534 million during 2011.

LEVERAGE ON DECLINE TREND

The recovery in the operating cash flow generation has allowed Hypermarcas to significantly reduce its leverage ratios. For the full year 2012, Fitch estimates net leverage to be about 3.0x. In 2011, net leverage was 5.1x. Fitch expects that the company will maintain net leverage around 2.5x over the medium term and may move toward a more shareholder friendly dividend policy. This would reduce free cash flow to the range of BRL150 million to BRL250 million per year. Hypermarcas' current strategy of deleveraging its balance sheet would be positive for the ratings if sustained.

SOLID LIQUIDITY POSITION; ROOM TO IMPROVE DEBT SCHEDULE AMORTIZATION

Hypermarcas' liquidity remains robust with BRL2.2 billion in cash and marketable securities as of Sep. 30, 2012. The company has BRL4.8 billion of debt, of which BRL602 million is short term. The outstanding cash balances supports debt amortization through the end of 2014 (BRL1.8 billion). During 2013, Fitch expects Hypermarcas to find alternatives to refinance part of its debt coming due in 2014 and 2015 (BRL838 million and BRL1.1 billion) in order to sustain its strong liquidity position.

KEY RATING DRIVERS

The ratings could be positively impacted by sustainable leverage reduction and/or a more conservative approach to acquisitions. Rating downgrades would likely be driven by large debt financed acquisitions that would weaken the company's capital structure from acceptable levels and/or deteriorate the reputation of its brands.

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