Fitch Upgrades Maestro to 'BBB+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded Maestro Peru S.A.'s (Maestro) Local and Foreign Currency Long-Term Issuer Default Ratings (IDR) and senior unsecured note ratings to 'BBB+' from 'BBB'. The Rating Outlook is Stable.

The upgrade reflects Maestro's proven and strengthened financial support from its holding company S.A.C.I. Falabella (Falabella, 'BBB+'/Outlook Stable). Although there are no legal guarantees on Maestro's debt obligations or cross-default provisions, Falabella has kept on providing tangible financial support to Maestro since its acquisition in September 2014. Last year, Maestro prepaid 35% of its senior unsecured notes through a Falabella's equity injection of USD77 million. As of March 2016, intercompany short-term loans for PEN205 million was provided to Maestro from its parent to finance working capital needs.

KEY RATING DRIVERS

Strong Rating Linkage to Parent:

Maestro's ratings reflect the strong operational and strategic ties between Maestro and its holding company. Falabella is actively involved in the management of Maestro and has complete control of Maestro's Board of Directors due to its 100% ownership stake. Maestro and Sodimac Peru are strategically important to one of Falabella's core retail businesses, home improvement retail. Collectively, Maestro and Sodimac Peru represent 16.8% of Falabella's home improvement retail store revenue and 7.5% of Falabella's total revenues as of LTM March 2016.

Strong Equity Holder:

Falabella is a regional retailer with operations in Chile, Peru Colombia, Argentina, Brazil, and Uruguay. Falabella has 458 stores, including department stores, home improvement stores, and supermarkets, as well as 40 shopping malls. The company also has a large and solid financial services business that has over 4.8 million active accounts and a loan portfolio of USD6.2 billion. As of LTM March 2016, the group had revenues of USD12.7 billion.

Sustainable Market Position:

By acquiring Maestro, Falabella strengthened its leadership in home improvement retail business in Peru doubling its market share in the modern retail channel in Peru. Through Maestro, Falabella diversified into a new brand, increased home improvement stores from 27 to 57 in strategic locations nationwide and acquired an important land bank for future developments. Maestro maintains an established and recognized brand and it is well positioned as a low-price specialist focused on both do-it-yourself (DIY) individuals as well as professional customers, while Sodimac targets more on family oriented customers. Maestro's sustainable market position is supported by the positive medium-term fundamentals of Peru's home improvement industry reflected in housing deficit and the industry's low penetration.

FCF trending to positive:

The company's FCF was negative PEN104 million as of LTM March 2016, considering a Fund From Operations (FFO) of PEN31 million minus PEN135 million as a working capital negative variation due to higher inventories as well as account payables reductions in order to align Maestro to the Group's practices and get favorable conditions with providers. Capex was reduced to maintenance levels following Maestro's acquisition in 2014 as the Group doubled the number of home improvement stores in Peru. For YE2016, Fitch expects limited capex for maintenance and improvements on existing stores and a FCF trending to positive.

Weak Operating Results to Improve:

Maestro's revenues of PEN1,375 million during the LTM March 2016 decreased compared to 2015 (PEN1,382 million) and 2014 (PEN1,493 million) after showing a high revenue growth in the prior years. Same store sales (SSS) reduced in 7.5% in 2015 and 3.9% in the first quarter of 2016. This declined is explained by an adverse business environment as well as more dynamism from its competitors while Maestro was in re-organization and consolidation after its acquisition. Fitch expects a recovery since the second half of the year following measures to be taken by the new government to boost consumer confidence as well as savings coming from synergies within the Group and know-how from Sodimac.

Expected Deleverage:

Maestro's gross adjusted leverage, measured by total adjusted debt divided by EBITDAR, and net adjusted leverage ratios were 5.1x and 4.8x as of March 2016, respectively. The company's leverage is high for its rating category but it is mitigated by the company's strong parent support and the potential improvement in its cash flow generation and reduction on debt. The company's debt is mostly compounded by the remaining USD130 million unsecured notes (100% hedged against currency risk).

KEY ASSUMPTIONS

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

--Revenues decrease at 1% in 2016 and recover since 2017 at an annual growth rate of 3%;

--EBITDA margin improvement from 9% in 2016 to 10% in 2017 onwards;

--Capex at around USD6.5-7.5 million per year. Number of stores maintains at current level (30 stores);

--No dividend payments;

--Positive FCF;

--Operational and financial support from Falabella.

RATING SENSITIVITIES

Negative: Maestro's ratings benefit from its ownership by Falabella because of its strong operational and strategic ties, based on Fitch's Parent and Subsidiary linkage criteria. Should the current level of operational and strategic ties be reduced, then a rating action based on Maestro's much weaker standalone credit profile could follow. If Maestro encountered operational and financial difficulty, Fitch would expect Falabella to take steps to demonstrate support to its subsidiary. Should such support not be forthcoming a rating downgrade could take place. Maestro's ratings would also be downgraded following a rating downgrade of Falabella.

Positive: While not expected at this time, an upgrade and/or Positive Outlook would depend on positive actions on Falabella's rating.

LIQUIDITY

The company's liquidity benefits from Falabella's potential support. Fitch expects Maestro to improve liquidity and reduce leverage as a result of lower capex and recovery on margins as well as cash provided through equity injections and intercompany loans. Additionally, Maestro, through its parent, currently has access to bank financing although it has limitations on additional indebtedness due to its unsecured notes covenants.

FULL LIST OF RATING ACTIONS

Fitch has upgraded the ratings for Maestro Peru S.A. as follows:

--Local and Foreign Currency Long-Term IDR to 'BBB+' from 'BBB';

--Senior unsecured debt to 'BBB+' from 'BBB'.

The Outlook is Stable.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009856

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009856

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160802006991/en/

Fitch Ratings
Primary Analyst
Johnny Da Silva
Director
+1-212-908-0367
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Josseline Jenssen
Director
+511-372-0681
or
Committee Chairperson
Daniel R. Kastholm, CFA
Regional Group Head - Latin America
+1-312-368-2070
or
Media Relations
Peter Fitzpatrick
+44 20 3530 1103
London
[email protected]

Source: Fitch Ratings

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