Fitch Affirms Cencosud's IDR at 'BBB-'; Outlook Negative
NEW YORK -- April 17, 2013
Fitch Ratings has affirmed Cencosud S.A.'s (Cencosud) ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB-';
--Local Currency IDR at 'BBB-';
--USD750 million unsecured notes due in 2021 at 'BBB-';
--USD1.2 billion unsecured notes due in 2023 at 'BBB-'.
The ratings have been removed from Rating Watch Negative and assigned a
Negative Outlook. Cencosud's ratings were placed on Negative Watch during
October 2012 following the company's announced acquisition of Carrefour SA's
Colombian operations for USD2.5 billion. The decision to affirm and remove
Cencosud's ratings from Rating Watch Negative follows the company's USD1.6
billion capital increase and its successful issuance of an USD1.2 billion
international note. These transactions improved liquidity, lowered refinancing
risks, and improved the company's capital structure. On a pro forma basis for
the equity issuance, Cencosud's gross adjusted leverage as measured by total
adjusted debt to EBITDAR was 4.6x.
The Negative Outlook reflects challenges the company will continue to face as
it seeks to lower leverage to around 3.5x. Cencosud's plan to lower debt
entails limiting capital expenditures to around USD800 million, scaling back
on acquisition activity, and focusing on integrating its acquired assets.
Challenges the company faces in lowering debt organically include repatriating
proceeds from its business in Argentina, which represent about 20% of the
company's EBITDA. Dividends are not likely to be scaled back as well due to
debt raised by Cencosud's controlling shareholder, USD800 million, to fund its
participation in the company's capital increase.
KEY RATING DRIVERS:
Cencosud's ratings are supported by its solid regional market position,
business and geographic diversification, adequate liquidity, and stable cash
flow generation. The factors constraining the rating include the company's
high leverage driven by fast growth through acquisitions; exposure to
Argentina's high sovereign risk; and the sensitivity of its financial (credit
card) business to macroeconomic downturns.
Cencosud has a dominant position in the retail business in Chile, a strong
market position in Peru, Argentina, and northeast Brazil, and a growing
presence in Colombia, recently consolidated with the acquisition of Carrefour
S.A.'s Colombian unit. The company's business model is predictable in terms of
cash flow generation, which reflects the predominance of the less-cyclical
supermarket retail format and a very stable cash-flow-generation shopping mall
business. These two business units represent around of 60% and 20% of the
company's total EBTDA and allow it to partially mitigate for the more cyclical
nature of its financial services, department store and home improvement
The company's cash generation, as measured by EBITDAR, was USD1.7 billion
during 2012, including approximately USD297 million in rentals. The company
had USD9.3 billion in total adjusted debt at the end of 2012. This debt
consisted primarily of USD7.2 billion of on-balance-sheet debt and an
estimated USD2.1 billion of off-balance-sheet debt associated with lease
obligations (rentals). On a pro forma basis, considering the proceeds from the
company's USD1.6 billion equity increase completed during March 2013,
Cencosud's gross adjusted leverage ratio was 4.6x.
Cencosud's capacity to deleverage during 2013 will be driven by its ability to
integrate and improve acquired assets, reduce capital expenses and refrain
from additional acquisitions. Fitch's 2013 base case scenario considers
Cencosud's revenue growth to be between 12% and 15%, its EBITDA margins to
remain around 7.5%, and capital expenditures of approximately USD800 million.
Under this scenario, Cencosud's gross adjusted leverage is projected to be
below 4x by the end of 2013 and move toward 3.5x during 2014.
The company's cash position is not expected to materially improve during 2013.
Cencosud's liquidity position post recent acquisition was viewed as weak as
the acquisition was initially financed with USD2.5 billion in short-term
funding. Pro forma, post equity issuance, the company's cash and short-term
debt is estimated at USD500 million and USD900 million, respectively.
A factor constraining the ratings includes Cencosud's operations in Argentina.
Over the medium term, the growth of the Colombian operations is expected to
reduce Cencosud's exposure to Argentina. The acquisition of Carrefour's
Colombian unit increases Cencosud's regional presence in the Latin America
retail industry and reduces its exposure to Argentina. During 2013, the
company's Colombian assets are expected to generate about 10% of the company's
Although Cencosud has begun to deleverage through the recent capital increase,
the Negative Outlook reflects leverage that remains high for the rating
category, which will require the company to aggressively manage its capex
levels during the next two years in an effort to reduce debt through free cash
flow. The Negative Outlook also factors in challenges that Cencosud faces in
Argentina, which limits its capacity to repatriate cash from its profitable
operations in these markets.
The inability of the company to materially lower leverage during the next 12
to 24 months could result in a negative rating action. Given the company's
current capital structure, a ratings upgrade is not likely in the near term
absent a substantial increase in equity.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'National Ratings Criteria', Jan. 19, 2011.
Applicable Criteria and Related Research
Corporate Rating Methodology
National Ratings Criteria
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Jose Vertiz, +1 212-908-0641
Fitch Ratings, Inc.
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Andrea Jimenez, +562 - 499-3322
Joe Bormann, CFA, +1 312-368-3349
Managing Director, Latin America Corporates
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