December 18, 2017 / 7:33 PM / 2 months ago

Fitch Affirms Grupo Unicomer's Ratings at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) MEXICO CITY, December 18 (Fitch) Fitch Ratings has affirmed Grupo Unicomer Company Limited's ratings, including its Issuer Default Ratings, at 'BB-'. The action reflects the company's leading business position in most of the countries where it operates and the solid financial position of its main shareholders. The rating also incorporates Grupo Unicomer's geographic and format diversification, which have contributed to positive consolidated cash flows from operations (CFFO) throughout economic cycles. The company has been reporting stable operational results based on a business model that targets low-income to middle-income segments. Grupo Unicomer's ratings also consider its growth strategy through acquisitions, funded mainly with debt, which in turn has prevented it from reducing consolidated leverage. KEY RATING DRIVERS Operating Environment and Format Diversification: Grupo Unicomer has commercial operations in 24 countries across Central America, South America and the Caribbean. The company has a track record of more than 16 years in consumer durables sales, which has enabled it to develop long-term relationships with suppliers and competitive advantages as to the location of its stores within small countries where prime retailing points of sale are very limited. The company maintains a leading business position in the selling of consumer durables goods, supported by its proprietary financing services and economies of scale in terms of purchasing power and logistics. Geographic Diversification: Geographic diversification allows Grupo Unicomer to have a broad revenue base supported by different economic dynamics that mitigates the company's country risk of any individual market. Jamaica, Trinidad & Tobago, Costa Rica, Ecuador and Honduras are among the most important cash flow contributors, giving the company strength and stability to its operating cash flows. Most of the other countries in which the company operates are rated within the 'B' rating category. The company has several store formats and brands across their operations. Positive Cash Flow from Operations: For the LTM ended September 2017, the company generated USD59.9 million of CFFO. Fitch expects the company's CFFO to be above USD55 million per year during 2018-2020. Grupo Unicomer is focused on recovering the profitability margins it had in the past (around 13.5% of EBITDA margin). Capex levels should be around USD38 million per year during the medium term excluding potential acquisitions. The last acquisitions occurred in 2015-2016, when the company acquired two retail chains, one in Paraguay and the other in the Caribbean countries of Bonaire, Curacao and St. Maarten. Growth Funded Mainly with Debt: Historically, Grupo Unicomer has expanded its operations through a combination of organic and inorganic growth. Since its inception, the company has done important acquisitions that increased its size and coverage. While organic growth was primarily funded with internal operating cash flows, acquisitions were funded mainly with debt. As of September 2017, lease adjusted debt/EBITDAR was 4.9x. Unicomer's leverage ratios were affected by lower revenues and profitability due to lower consumption in the islands affected by the 2017 hurricane season and to a USD5 million write-off related to the credit portfolio of the affected islands. Excluding the write-off, adjusted debt/EBITDAR would have been 4.8x; Fitch expects the company to reduce this ratio to around 4.3x in the medium term. Credit Spread Offsets Moderate Level of Overdue Accounts: The company's consumer finance strategy includes sufficient financial spreads to cover credit risks associated with the portfolio. During the last five years, the portfolio yield after deducting uncollectable expenses and write-offs has been nearly 40% on average. As of Sept. 30, 2017, Grupo Unicomer's portfolio had an average of 7.8% of non-performing loans (NPLs; past due accounts for 90 days or more). The company has NPL provisions equivalent to 107% of those non-performing loans. The level of overdue accounts is partially offset by the company's efficient collection program and portfolio yield. Shareholders' Sound Financial Position: The ratings consider the sound financial position of Grupo Unicomer's shareholders Milady Group (Milady 50%) and El Puerto de Liverpool, S.A.B. de C.V. (Liverpool 50%), with a proven track record in retail since 1847. Fitch is not incorporating into Unicomer's ratings potential financial support from its shareholders, if needed. Also in Fitch's view, Unicomer's shareholders' solid credit profiles gives flexibility to Unicomer, as the shareholders' financial position does not rely on Unicomer's dividend payment. Milady's operations include real estate developments, department store chains, all Inditex's franchises in Central America, and a vertically integrated textile manufacturing and wholesaling business. Liverpool (BBB+/Stable), a department store with 249 units and 25 shopping malls in Mexico, had USD5.9 billion in total revenues during the LTM ended Sept. 30, 2017 with 15% of EBITDA margin. Liverpool's total adjusted debt/EBITDAR (including a captive finance adjustment) was 1.3x for the same period. DERIVATION SUMMARY Grupo Unicomer's business risk profile is closer to mid-to-upper level of the 'BB' category when compared to peers. The company has about the same scale in number of stores as Grupo Elektra (BB/Stable), while Grupo Famsa (B-/Stable) has fewer stores. Unicomer's credit portfolio is smaller in size than Elektra and Famsa, as it does not lend through regulated banking operations. The company is more geographically diversified than Elektra and Famsa, which mitigates the operating risk of any individual market. From a financial risk profile view, Unicomer leans towards the 'BB-'/'B+' range when compared to peers. The company maintains a weaker financial position in terms of profitability, flexibility and financial structure than Elektra but it is stronger than Famsa. Unicomer's operating margins are higher but closer to Famsa's, while Elektra has the best operating margins of the three companies. Unicomer ranks in the middle between Elektra and Famsa in terms of credit metrics and liquidity position. As per Fitch's criteria, Unicomer's applicable Country Ceiling is 'BB+' and does not constrain the ratings, as the Foreign Currency IDR is lower than the applicable Country Ceiling. At the current rating level, the operating environment (OE) of the countries in which the company operates does not constrain the ratings, but OE would likely constrain them in mid-to-upper 'BB' rating range. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of 3.6% on average for 2018-2021; - EBITDA margin of 11.5% for year-end 2018 and close to 12.2% going forward; - Total Lease Adjusted Debt to EBITDAR of 4.0-4.4x in the medium term; - Capex of USD37.6 million per year on average for 2018-2021; - One-off provision of USD5 million related to accounts receivables of islands affected by the 2017 hurricane season; - Dividend payments equivalent to 25% of net income for 2018-2021; - Stable portfolio credit quality; - Potential inorganic growth in 2019. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Diversification of operating subsidiaries in countries with higher sovereign risk, consolidated adjusted net leverage below 4.0x on a sustained basis, retail-only adjusted net leverage below 3.5x on a sustained basis, maintained credit quality of the portfolio, and significant reduction on its current maturities that result in a consistent ratio of cash plus CFFO-to-short-term debt of 1.0x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Deterioration in overdue accounts from the consumer finance business, significant reduction in cash flow generation, further debt-financed acquisition activity resulting in a consolidated adjusted debt/EBITDAR above 5x and/or deterioration of liquidity compared to short-term debt. LIQUIDITY Liquidity is adequate. As of Sept. 30, 2017, Grupo Unicomer reported total debt of USD772.6 million, of which USD187 million was classified as short-term. This level of current debt compares with USD86 million of cash and marketable securities and USD161.6 million of uncommitted undrawn revolving credit facilities. The company's main source of liquidity is internal cash generation consisting of positive CFFO. Cash and equivalents of USD86.2 million and a short-term net receivables portfolio of USD587.9 million further support the company's liquidity. The liquidity ratio, measured as FCF plus cash and marketable securities over short-term debt, was 0.6x at Sept. 30, 2017; when including short-term account receivables in the calculation the ratio increases to 3.7x. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Grupo Unicomer Company Limited: --Long-Term Foreign Currency Issuer Default Rating (IDR) 'BB-', Outlook Stable; --Long-Term Local Currency IDR 'BB-', Outlook Stable; --USD350 million senior notes due 2024 at 'BB-'. Contact: Primary Analyst Maria Pia Medrano Associate Director +52 55 5955 1600 Fitch Mexico S.A. de C.V. Blvd. Manuel Avila Camacho 88. Piso 10. Lomas de Chapultepec, Ciudad de Mexico Secondary Analyst Johnny Da Silva Director +1 212 908 0367 Committee Chairperson Sergio Rodriguez Senior Director +52 81 8399 9100 Summary of Financial Statement Adjustments - --Lease equivalent debt was adjusted with a 7x multiple. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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