OREANDA-NEWS. Fitch Ratings has affirmed El Puerto de Liverpool, S.A.B. de C.V.'s (Liverpool) Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB+'. The Rating Outlook for the international IDRs has been revised to Positive from Stable. Fitch has also affirmed Liverpool's National Scale Long-term ratings at 'AAA(mex)', with a Stable Outlook. A full list of rating actions follows at the end of this release.

The Outlook revision to Positive reflects Liverpool's consistent operating and financial track record through business cycles. Fitch will continue to monitor the company's execution of its growth strategy, and continued strong positive cash generation, in conjunction with low leverage measured as total adjusted debt-to-funds from operations (FFO) below 2x over time, could result in an upgrade.

The affirmations reflect the company's leading business position in Mexico, where the company has solid market participation, geographic diversification and multiple store formats, all of which support its consistent positive cash flow generation, ample financial flexibility, and low leverage levels.

KEY RATING DRIVERS

Strong Market Position
Liverpool is the leader in the middle-, middle-high and high-income segments of department stores in Mexico. During the latest 12 months (LTM) ended June 30, 2015, the company's retail revenues reached MXN85.1 billion, an increase of 11.4% compared to the same period a year ago. Liverpool's revenues are 2x higher than Grupo Sanborn's, its closest public traded competitor. Liverpool's EBITDA margin for the LTM June 2015 was 16.3% compared to Grupo Sanborn's 12.3%.

As of June 30, 2015, the company operates 107 stores across 57 cities throughout Mexico: 75 under the name of Liverpool, 28 Fabricas de Francia and four stores in the format Liverpool Duty Free. Around 85% of total units are owned by Liverpool. The company also has 24 shopping malls operating in 16 cities and owns a 50% stake in Regal Forest Holding Co., which has 13 different store brands selling consumer durable products in 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 Flows
Liverpool has a diversified revenue base; for the LTM June 2015, 85.5% of total revenues were contributed by its retail segment, 11.1% from its financial services division, and 3.3% from real estate. During the first half of 2015 (1H15), retail segment total revenues grew 12% in the period while same store sales (SSS) grew 8.2%, slightly below the Asociacion Nacional de Tiendas de Autoservicio y Departamentales (ANTAD) department store segment growth of 9.4%. Fitch believes that the company is well positioned to continue its business strategy given the demographic and socioeconomic fundamentals in Mexico, with low inflation rates and a growing middle-class.

Increase in Overdue Account Receivables; Still Manageable
Liverpool's credit portfolio non-performing loans (NPL) overdue 90 days or more have remained below the peak levels recorded in 2008 of 5.2%. As of June 2015, NPLs were 4.4%; slightly above expected levels. This is a result of the recently introduced Liverpool Premium Card (affiliated with Visa) which carries higher overdue amounts compared to the traditional in-house card. Fitch estimates that annual levels of NPLs will remain below 5% and the company will continue with its reserve policy of 2x the overdue balance. Liverpool's loan portfolio at June 30, 2015 amounted to MXN29.1 billion and the provision for overdue accounts was MXN2.2 billion.

FX Exposure
Fitch estimates that around half of Liverpool's merchandise is exposed to exchange rate fluctuations, as is its dollar-denominated debt (USD300 million due in 2024). Merchandise exposure is mitigated by re-pricing in some articles after inventory restocking; a proportion of exchange rate movement is absorbed by the final customers. Regarding the USD300 million senior notes, the company has hedges in place that cover interest and principal currently below the market spot rate.

Free Cash Flow (FCF) in Neutral Territory
Fitch views positively the company's capability to generate strong cash from operations (CFO) through economic cycles. During the LTM ended June 30, 2015, Liverpool generated positive CFO after interest expense of MXN8.8 billion. Historically, the company's growth strategy has been funded with internally generated funds and debt. Fitch expects 2015-2017 capex investments between MXN6 billion-MXN7.5 billion and dividend payments in line with Liverpool's internal policy of 15% of prior year net income (approximately MXN1 billion per year) which will result in neutral- to slightly-negative FCF.

Sound Financial Position
Liverpool's gross adjusted leverage measured as total adjusted debt/EBITDAR for the LTM ending June 30, 2015 has improved to 1.2x, from 1.3x and 1.4x at year-end 2014 and 2013, respectively. Despite strong organic growth, Fitch believes the company's leverage will remain relatively stable at current levels. For 2015-2017, Fitch estimates the company's gross adjusted leverage will remain around 1.3x- 1.4x.

Fitch's projected improving credit ratios reflect an increase in EBITDAR generation to around MXN15 billion and stable absolute on-balance-sheet debt. Liverpool's growth will be underpinned by its store expansion plan in conjunction with an increased loan portfolio. The company expects to continue funding its growth strategy through cash on hand and internally generated cash flow. Fitch expects that a portion of the new store openings will be deployed through leased units.

LIQUIDITY

The company has good liquidity backed by its internal cash flow generation; also, the current loan portfolio covers its total debt by about 1.8x. After a successful refinancing in late 2014, Liverpool faces no debt maturities until 2017. Liverpool has good access to domestic and international capital markets when in need of external financing, 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.

KEY ASSUMPTIONS

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

--Revenue growth in the mid-single digits over the medium term.
--EBITDA margin between 15%-16%.
--Average capex around 7.5% of revenue in 2015-2017.
--Dividends in line with company policy of 15% of previous year net income.
--Adjusted debt leverage ratio to remain below 1.4x.
--Absence of inorganic growth (i.e. acquisitions).

RATING SENSITIVITIES
The following are factors that individually, or collectively, could result in a positive rating action:
--Strengthening in the company's credit profile through lower leverage ratios (FFO-adjusted leverage at or below 2x), in conjunction with consistently positive FCF throughout the business cycle.
--Geographic diversification while maintaining a strong financial profile, low leverage and positive FCF.

The following are factors that individually, or collectively, could result in a negative rating action:

--If the company's expansion strategy is financed primarily through debt, resulting in adjusted leverage ratios above 2x and/or consistent negative FCF above Fitch's expectation;
--A substantial increase in non-performing accounts receivable levels higher than those presented in the past three years;
--Substantial reductions in margins that lead to weak interest coverage;
--Large debt-financed acquisitions.

Fitch has affirmed Liverpool's ratings as follows:

--Foreign and Local Currency IDRs at 'BBB+'; Outlook revised to Positive from Stable;
--Long-term National Scale rating at 'AAA(mex)'; Stable Outlook.
--Short-term National Scale rating at 'F1+(mex)';
--Long-term Certificados Bursatiles issuances (LIVEPOL 08,10,10U,12,12-2) at 'AAA(mex)';
--Senior unsecured notes due 2024 at 'BBB+';
--Short-term Certificados Bursatiles program for up to MXN5 billion at 'F1+(mex)'.