Research Update:

Gr upo Famsa Outlook Revised To Negative From Positive; 'B' Cor porate Credit Rating Affir med

Primary Credit Analyst:

Sandra Tinoco, Mexico City (52) 55-5081-4473; sandra.tinoco@standardandpoors.com

Secondary Contact:

Luisa Vilhena, Sao Paulo (55) 11-3039-9727; luisa.vilhena@standardandpoors.com

Table Of Contents

Overview Rating Action Rationale Outlook

Ratings Score Snapshot Related Criteria And Research Ratings List

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Research Update:

Gr upo Famsa Outlook Revised To Negative From

Positive; 'B' Cor porate Credit Rating Affir med

Overview

• Mexico-based specialty retailer GFamsa's revenues and EBITDA generation have deteriorated beyond our expectations due to a less dynamic Mexican economy, a more cautious consumer and a reduction in the granting of credit to consumption. This has also weakened Banco Ahorro Famsa's (BAF) asset quality, which was reflected in a deceleration on its deposits growth and personal loans, which increases the risk that GFamsa's cash flow generation and liquidity will deteriorate given its dependence on bank deposits for growth and the relevance of personal loans in the company's consolidated revenues.
• We are revising the outlook to negative from positive and affirming our 'B' corporate credit rating on GFamsa. The rating on its $250 million senior unsecured notes remains at 'B' with a recovery rating at '3'.
• The negative outlook reflects our expectation that the company will continue operating in a challenging market in the next 12 to 18 months which, together with the recent deterioration in the asset quality of BAF and a drop in its personal loans, reduces our expectations for the company's revenues and cash flow generation, given its dependence on bank deposits as a source of funding, and on personal loans as a source of revenues. We also expect GFamsa will not comply with its incurrence covenant, limiting its expansion program and liquidity further,
with debt to EBITDA levels at 4.7x-4.9x.

Rating Action

On Aug. 29, 2014, Standard & Poor's Ratings Services revised its outlook on the corporate credit rating on Grupo Famsa S.A.B. de C.V. (GFamsa) to negative from positive. At the same time, we affirmed the 'B' corporate credit rating on the company. The issue-level rating on the company's debt remains at 'B' with a recovery rating of '3'.

Rationale

The rating action reflects the recent deterioration in GFamsa's sales and EBITDA generation beyond our expectations, amid a more challenging market and a more cautious consumer environment. It also reflects a drop in the credit for consumption and a less dynamism in the Mexican economy. The further deterioration in BAF's asset quality and reduction in deposits growth and personal loans increases the risk that GFamsa's cash flow generation and liquidity will weaken, as we believe bank deposits are a key source of funding for the company's expansion program and working capital needs, while personal loans correspond to about 30% of the company's sales . With this scenario, GFamsa could face further deterioration in its credit metrics, with
an EBITDA interest coverage ratio of less than 1.2x, which could weaken its capital structure, especially considering its significant short-term debt. As of June 30,
2014, short term debt was Mexican peso (MXN) 3.5 billion, which corresponded to 45%
of total debt.
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Research Update: Grupo Famsa Outlook Revised To Negative From Positive; 'B' Corporate Credit Rating Affirmed

We assess GFamsa's business risk profile as "fair." We expect the company's Mexican retail operations to continue to be its main revenue driver, representing almost 90% of sales. We also expect the company will continue to operate in the highly fragmented retail industry in Mexico, which has become more challenging due to a
less dynamism in the Mexican economy and the recently approved fiscal reform, which has led to an environment with a more cautious consumer. We also expect the company to maintain its small market share compared to that of other players in Mexico and that its scale will remain small compared to other regional and global players.
The aforementioned is partially mitigated by our expectation that the company will continue to have EBITDA margins above 20% in its retail division, which surpasses those of most of its regional and global peers. The favorable operating efficiencies are consequence of:
• Substituting the sale space of clothes for furniture, despite recent pressures in the furniture division;
• Growth through smaller stores, and more stand-alone bank branches (including the recently acquired pawn-broking branches); and
• The sale of higher margin products such as its Kurazai motorcycles (a high ticket item that occupies limited sales floor space).
We assess GFamsa's financial risk profile as "aggressive." The company has continued funding most of its expansion program and working capital needs with bank deposits and cash flow generation. We believe this will continue, and given our lower expectation for annual deposit base growth in the high-single-digit in the next two years, will reduce the need for additional debt. Moreover, despite the recent deterioration in the company's revenue and EBITDA generation, we expect debt-to- EBITDA ratio to continue to be less than 5.0x in the next two years. Our adjusted numbers consider pensions, operating leases and captive finance adjustment. The last one excludes BAF's operations to isolate retail division metrics for global comparison purposes. Also, our adjusted debt includes 75% of our expected cash on
the company.
We apply a two-notch negative adjustment to our 'bb-' anchor based on our "less than adequate" liquidity and "negative" comparable ratings analysis assessments. Given that we expect short-term debt to continue to represent 40%-45% of the company's total debt, and high working capital needs and capital expenditures (capex) will remain despite our expectations for a less aggressive expansion program, GFamsa's liquidity will continue to be "less than adequate" in the next two years. Moreover, we don't expect the company to comply with its incurrence covenant in the next two years, which also supports our "less than adequate" liquidity assessment, as we
don't view the company's non-compliance as an overarching risk. Our comparable rating analysis reflects our belief that the company's revenue and same store sales (SSS) growth is still below that of other companies that we rate in the 'B+' category. Although we still expect better performance during the second half of
2014, we don't believe the company will fully recover until the second half of 2015. Therefore, we don't expect our comparable ratings analysis on GFamsa to change in
the next 12 months.
Our base-case scenario assumes:
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Research Update: Grupo Famsa Outlook Revised To Negative From Positive; 'B' Corporate Credit Rating Affirmed

• GDP growth for Mexico of 2.7% in 2014 and 3.5% in 2015
• Slower recovery in consumer confidence and credit for consumption.
• Mexican department stores' revenue growth will be in the mid-single-digit in 2014, which is in line with that in the U.S., given a more cautious Mexican consumer in terms of discretionary spending due to payroll tax increases and the recently approved fiscal reform in Mexico, which has reduced household wealth.
• A less dynamic Mexican economy, more cautious consumer, our expectation of the company's less aggressive expansion program of seven new stores in Mexico (vs. our previous estimates of 10 stores), bank deposits growth in the high-single-digits
in the next two years, a drop in personal loans and recent deteriorated asset quality at the bank, weakening its risk position, will lower consolidated revenues by 1.3% in 2014.
• Revenues in Mexico to decrease almost 2%, while the U.S. division will show low single-digit growth.
• We expect credit sales to continue representing about 50% of total sales, while personal loans will continue to represent near 30% of total sales despite its recent slowdown.
• We expect personal loans to drop about 3% in 2014 and show a recovery of a low- single-digit growth in 2015.
• By 2016, GFamsa's operations in Mexico will include 383 stores, the U.S. 25 stores, and BAF will have 535 banking branches including the pawn-brokering branches which will be 100% converted to BAF branches.
• We expect the company's capex to be MXN390 million - MXN410 million per year for the next two years.
• Due to less credit granting, we expect the company to post positive free operating cash flow (FOCF) in 2014 and will not require additional debt. We expect the company to significantly increase its credit portfolio in 2015, especially during the second half of the year, when we expect a more robust recovery in consumer demand, posting a negative consolidated FOCF of about MXN600 million and an adjusted negative FOCF of about MXN200 million, which the company will mainly fund with bank deposits and, to a lesser extent, with debt.
• We expect the company to take on about MXN800 million in debt throughout 2015 and
2016, which is below the $75 million (about MXN975 million) allowed according to
its $250 million unsecured notes offering memorandum, as we don't expect the
company to comply with its incurrence covenant in such period.
• We don't expect payment of dividends.
Based on these assumptions, we arrive at the following credit measures in the next two years:
• EBITDA margins of 20%-21%;
• Debt to EBITDA of 4.7x-4.9x;
• FFO-to-debt ratio of 16%-17%;
• EBITDA interest coverage of 4x-5x; and
• FFO cash interest coverage of 2.4x - 2.5x.

Liquidity

We assess GFamsa's liquidity as "less than adequate." We believe the company's sources will cover its uses by less than 1.2x in the next 12 months. We expect short-term debt to continue to represent about 40%-45% of total debt, although in
our base-case scenario we expect the company will continue to refinance it, as done
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Research Update: Grupo Famsa Outlook Revised To Negative From Positive; 'B' Corporate Credit Rating Affirmed

in the past. Moreover, we don't expect the company to comply with its incurrence covenant of a maximum unadjusted debt to EBITDA ratio of 3.25x in 2015 and 3.0x after June 1, 2016. However, we don't expect the company to need more funds beyond the $75 million in debt, which is allowed in a non-compliance scenario.
Our liquidity assessment on GFamsa is based also on the following:
• Good relationship with banks and improved standing in global and local capital markets;
• Flexibility to adjust capex and working capital needs if necessary, as it has shown in the past, which would maintain a "less than adequate" liquidity under an economic downturn; and
• Bank deposits will continue to fund most of the company's shortfalls.
Principal sources include:
• Cash and liquid investments of MXN1.7 billion as of June 30, 2014; and
• FFO of about MXN1.9 billion for the next 12 months.
Principal uses include:
• Debt maturities of MXN3.5 billion as of June 30, 2014; and
• Working capital outflows and capex needs of MXN694 million for the next 12 months.

Recover y Analysis

The recovery rating on GFamsa's $250 milion senior unsecured notes remains at '3', indicating our expectation of meaningful (50% to 70%) recovery for unsecured lenders in a hypothetical event of a payment default. The issue rating is 'B', the same as our corporate credit rating on the company.

Outlook

The negative outlook reflects our expectation that the company will continue operating in a challenging market in the next 12 to 18 months which, together with the recent deterioration in BAF's asset quality and a reduction on its personal loans, reduces our expectations for the company's revenues and cash flow generation, given its dependence on bank deposits as a source of funding and on personal loans
as a source of revenues. We also don't expect GFamsa to comply with its incurrence covenant, limiting its expansion program and liquidity further, with debt to EBITDA levels at 4.7x-4.9x.
Downside scenario
We could lower the ratings in the next 12 months if the company's revenues and EBITDA generation deteriorate beyond our expectations with consistent consolidated EBITDA margins below 10% and adjusted EBITDA margins below 20%, and/or an adjusted EBITDA interest coverage below 1.2x which could weaken the company's capital structure, especially considering its significant portion of short-term debt, which is partially mitigated by the $250 million senior unsecured notes that are due until
2020. We could also lower the ratings if BAF's deposits and/or personal loans
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Research Update: Grupo Famsa Outlook Revised To Negative From Positive; 'B' Corporate Credit Rating Affirmed

decelerate further, given their relevance to the company's expansion program and revenue growth, which could negatively affect its business risk profile.
Upside scenario
We could revise the outlook to stable if the company achieves a low-single-digit growth in revenues by 2015 and maintains consistent consolidated EBITDA margins near
10.5% and adjusted EBITDA margins above 20% while improving BAF's asset quality, maintaining a deposits growth in the high-single-digit and personal loans growth in the low-single-digit in the next 12 months. This will allow the company to grow and maintain its market positioning.

Ratings Score Snapshot

Corporate Credit Rating: B/Negative/--
Business risk: Fair
• Industry risk: Intermediate
• Country risk: Moderately high
• Competitive position: Fair
Financial risk: Aggressive
• Cash flow/Leverage: Aggressive
Anchor: bb-
Modifiers
• Diversification/Portfolio effect: Neutral (No impact)
• Capital structure: Neutral (no impact)
• Liquidity: Less than adequate (-1 notch)
• Financial policy: Neutral (no impact)
• Management and governance: Fair (no impact)
• Comparable rating analysis: Negative (-1 notch)
• Stand-alone credit profile: b

Related Criteria And Research

Related Criteria

• Criteria - Corporates - General: Methodology And Assumptions: Liquidity
Descriptors For Global Corporate Issuers - January 02, 2014
• General Criteria: Group Rating Methodology - November 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions - November
19, 2013
• Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments - November 19, 2013
• General Criteria: Methodology: Industry Risk - November 19, 2013
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Research Update: Grupo Famsa Outlook Revised To Negative From Positive; 'B' Corporate Credit Rating Affirmed

• Criteria - Corporates - Industrials: Key Credit Factors For The Retail And
Restaurants Industry - November 19, 2013
• Criteria - Corporates - General: Corporate Methodology - November 19, 2013
• Criteria - Corporates - General: Assumptions: Analytical Adjustments For Captive
Finance Operations - June 27, 2008

Related Research

Ratings List

Grupo Famsa S.A.B. de C.V. Corporate credit rating
Ratings
To From
Foreign and Local Currency B/Negative/-- B/Positive/--
Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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