OREANDA-NEWS. Fitch Ratings has affirmed El Puerto de Liverpool, S. A.B. de C. V.'s (Liverpool) Long-Term Local and Foreign Currency Issuer Default Ratings at 'BBB+' and has revised the Rating Outlook to Stable from Positive following the company's announcement to acquire 100% of Suburbia. Fitch has also affirmed Liverpool's long-term National scale rating at 'AAA(mex) '. A full list of rating actions follows at the end of this release.

The revision to a Stable Outlook reflects Fitch's view that a rating upgrade for Liverpool is unlikely in the next 12 months as the company will increase its debt levels enough to fund the acquisition of Suburbia and a percentage of Ripley Corp. S. A. (Ripley) equity. Fitch believes these agreements will not have an impact on Liverpool's 'BBB+' rating given its solid balance sheet and current low leverage. On a pro forma basis, adjusted debt/EBITDAR for Liverpool would be 2.6x for 2017 and it will trend toward 2.3x-2.0x by the end of 2019, which would be higher than the past five years' average but still consistent with the current rating category. The company plans to fund the MXN19 billion-transaction with a combination of cash and debt and Fitch does not foresees any material acquisition until leverage returns to historical levels.

In Fitch's opinion, the addition of Suburbia to Liverpool's portfolio should strengthen its business position in the medium - to low-income segment, create opportunities to capture synergies, and open the possibility to expand its financial business to Suburbia. On Aug. 10, 2016, Liverpool announced it reached an agreement with Wal-Mart de Mexico, S. A.B. de C. V. (Walmex) to acquire 100% of Suburbia, an apparel store chain in Mexico focused on the medium-low economic segment of the country. The agreement includes intellectual property rights of the Suburbia brand and its private labels; 119 stores (seven owned); a distribution center leased from third parties; and the operating purchases, commercial planning, product design, marketing and procurement divisions of the stores. The transaction is expected to close during the first quarter of 2017 and needs approval by the antitrust commission.

In Fitch's view, Liverpool's recent acquisitions - if materialized - will strengthen the company's business position by expanding its target market and geographic footprint, positioning it as a relevant player within the Latin American region in terms of scale and purchasing power. In July 2016, Liverpool entered into an agreement to make a public bid for at least 25.5% and up to 100% of the traded shares of Ripley Corp. S. A. (Ripley). The value to be paid could range between USD310 million and USD580 million, depending on the percentage of the public shareholders' acceptance. Fitch's base case takes into account that Liverpool will get a minority stake of Ripley and will account for this investment by the equity method.


Liverpool's ratings reflect the company's leading business position in Mexico, geographic diversification, and multiple store formats, all of which support its consistently positive operating cash flow generation and ample financial flexibility.

Strong Market Position

Liverpool is the leader in the middle-, middle-high and high-income segment of department stores in Mexico. During the last 12 months (LTM) ended June 30, 2016, the company's retail revenues reached MXN83.5 billion, 13.6% above those presented in 2015. As of June 2016, the company operates 113 stores across 57 cities throughout Mexico: 80 under the name of Liverpool, 29 Fabricas de Francia, and four stores in the format Liverpool Duty Free. Around 80% of total units are owned by Liverpool.

The company also has 25 shopping malls operating in 16 cities and owns a non-controlling 50% stake in Regal Forest Holding Co., which has 14 different store brands selling consumer durable products in 20 countries around Central and South America and the Caribbean. Regal Forest investment is recorded under the equity method of accounting.

Format and Business Diversification Provides Stable Cash Flow:

Liverpool has a diversified revenue base; for the LTM ended June 2016, 87.3% of total revenues were contributed by its retail segment, 9.7% from its financial services division and 3.1% from real estate. During the first half of 2016, retail total segment revenues grew 13.6% compared to the same period the year before, while same store sales (SSS) grew 9.1%, slightly below the average of 9.2% average for department store growth cited by the Asociacion Nacional de Tiendas de Autoservicio y Departamentales (ANTAD). Fitch believes that the company is well positioned to continue its business strategy given the current demographic and socioeconomic fundamentals in Mexico, with a growing middle class, low inflation rates, higher real wages and higher remittances due to the peso depreciation.

Recent Acquisitions Pressure Liverpool's Credit Metrics:

Fitch believes Liverpool's credit metrics, after the acquisition of Suburbia and investment in Ripley, will recover their historical levels in the medium term given its retail expertise and consistent operating and financial track record. As of June 2016, Liverpool's adjusted leverage measured as total adjusted debt/EBITDAR was 1.2x. According to Fitch's estimations, debt is expected to rise in 2017 to nearly MXN40 billion from the MXN14.5 billion in June 2016, resulting in adjusted leverage of 2.6x in 2017 after the Suburbia and Ripley's acquisitions.

FX Exposure Partially Mitigated

Fitch estimates that around half of Liverpool's merchandise is exposed to exchange rates. Merchandise exposure is mitigated by re-pricing some articles after inventory restocking; a proportion of exchange rate movements are absorbed by the final customer. The company has USD300 million of senior notes due in 2024. This USD-denominated debt has hedges in place that cover interest and principal, which are currently below the market spot rate.

Adequate Liquidity & Debt Maturity Schedule

The company has good liquidity backed by its cash on hand and cash flow generation; also, the current loan portfolio covered total debt as of June 2016 by about 1.4x. Liverpool's next debt maturity is a local bond for MXN2.1 billion due on March 2017. Liverpool has good access to domestic and international capital markets if needed, which further strengthens its financial flexibility. In addition, the company's large portfolio of owned stores and shopping malls provides solvency through an important base of unencumbered assets.


Fitch's key assumptions within the rating case for Liverpool include the following:

-- Liverpool gets a 47% stake of Ripley in 2016 with a combination of cash and debt.

-- Consolidation with Suburbia takes place in 2017; the transaction is funded 100% with debt.

-- Revenue growth in the mid-single digits during 2018-2019.

-- EBITDA margin between 15%-16%.

--Average capex around 7.2% of revenue in 2016-2019.

--Dividends in line with company policy of 15% of previous year's net income.

-- Adjusted debt/EBITDAR ratio to remain below 3.0x.


Factors that individually, or collectively, could result in a negative rating action include: an expansion strategy financed primarily with debt, a sustained adjusted leverage ratio (gross adjusted debt/EBITDAR) above 3.0x, consistently negative FCF below Fitch's expectations, a substantial deterioration in non-performing receivables (more than 90 days), and lower profitability margins.

Factors that individually, or collectively, could result in a positive rating action include: a successful integration with Suburbia, strong operating cash generation, a strengthening in the company's credit profile through a FFO-adjusted leverage (adjusted debt/FFO) below 2.0x and adjusted debt/EBITDAR ratio below 1.5x, consistently positive FCF throughout the business cycle, and geographic diversification.


Fitch has affirmed Liverpool's ratings as follows:

--Long-Term Foreign and Local Currency IDRs at 'BBB+', Stable Outlook;

--Long-Term National rating at 'AAA(mex)', Stable Outlook;

--Short-Term National rating at 'F1+(mex)';

--USD300 million Senior Notes due 2024 at 'BBB+';

--Long-term Certificados Bursatiles issuances (LIVEPOL 08,10,10U,12,12-2) at 'AAA(mex)';

--Short-term Certificados Bursatiles program for up to MXN5 billion at 'F1+(mex)'.