Fitch Rates Cencosud's Proposed Notes 'BBB-'
NEW YORK -- November 21, 2012
Fitch Ratings has assigned a 'BBB-' rating to Cencosud S.A.'s (Cencosud)
proposed notes of up to USD1 billion and placed that rating on Negative Rating
Watch. Proceeds from the proposed issuance will be used entirely to refinance
existing debt. See the full list of ratings at the end of this release
Fitch placed Cencosud's ratings on Rating Watch Negative on Oct. 19, 2012
following an announcement by the company that it had agreed to buy Carrefour
SA's Colombian unit for approximately USD2.5 billion. These rating actions
reflect pressure on the company's liquidity position and financial
flexibility, as a result of this transaction, which will initially be funded
with short-term debt.
The proposed senior notes issuance is part of the company's financial strategy
to raise long-term financing and equity of up to USD1 billion and USD1.5
billion, respectively, to fund the acquisition of Colombian operations. The
company's capital increase is expected to take place and be fully executed
during the first quarter of 2013. The successful completion of the proposed
issuance and capital increase during the next few months would be viewed as
positive credits factors, as the targeted outcome of these measures is to
bolster Cencosud's capital structure and improve its debt repayment schedule.
Cencosud has a dominant position in the retail business in Chile, and a strong
market position in Peru, Argentina, and northeast Brazil. The company benefits
from a diversified business model with a multi-format strategy. Fitch views
the acquisition, which is expected to close before Dec. 31, 2012, as
strategically positive over the medium term. From an operating risk point of
view, it will further improve Cencosud's geographic diversification and reduce
its exposure to Argentina, a country with high sovereign risk. The operations
being acquired (Carrefour's Colombian unit) include 72 hypermarkets, 16
convenience stores and four cash-and-carry stores.
The company's cash generation, as measured by EBITDAR, was USD1.5 billion
during the LTM period ended Sept. 30, 2012, while its EBITDAR margin was 8.4%.
As of Sept. 30, 2012, Cencosud had approximately USD6.7 billion in total
adjusted debt, consisting of USD4.8 billion of on-balance-sheet debt and an
estimated USD1.9 billion of off-balance-sheet debt associated with annual
lease obligations of approximately USD256 million.
Cencosud's gross adjusted leverage, as measured by total adjusted debt/EBITDAR
ratio, was 4.3x during the LTM. This ratio was considered weak for the rating
category. Following the closing of the aforementioned transaction, Fitch
estimates this ratio will increase to around 5.5x. Depending upon the level of
equity raised, this ratio would then fall to about 4.0x, which continues to be
viewed as relatively weak for the rating category.
Expectations by Fitch that the company's total adjusted debt to EBITDAR will
consistently be higher than 3.5x during the medium term would likely result in
a downgrade. A key component of building a stronger capital structure will be
a successful equity issuance at the higher end of the targeted range.
Conversely, successful completion of the proposed issuance, which will reduce
liquidity risk, as well as a stronger capital structure that will result in
gross leverage being in the range of 3.0x to 3.5x by the end of 2013, would
likely result in resolution of the Rating Watch and the assignment of a Stable
Fitch currently rates Cencosud as follows:
--Long-Term Issuer Default Rating (IDR) 'BBB-',
--Local Currency IDR 'BBB-', RWN;
--USD750 million unsecured notes due in 2021 rating 'BBB-'.
All of Cencosud's ratings, including the proposed notes, are on Rating Watch
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria
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