Grupo Famsa de CV : Fitch affirms Famsa's IDRS at 'B-', Outlook Stable

FITCH AFFIRMS FAMSA'S IDRS AT 'B-', OUTLOOK STABLE

Fitch Ratings-New York-23 February 2018: Fitch Ratings has affirmed Grupo Famsa S.A.B.

de C.V.'s (Famsa) Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) at 'B-', National Long Term Rating at 'BB (mex)' and National Short Term Rating at 'B(mex)'. The Rating Outlook is Stable. The rating action reflects Famsa's market position within the Mexican retail sector, geographic and product diversification, stable operating cash flow generation by the Mexican retail operation, and the expectation of a gradual improvement in leverage.

Fitch expects Famsa to receive at least MXN0.8 billion payment from its main shareholder (Humberto Garza Gonzalez) guarantee in 2018 to reduce debt. Fitch also expects that Famsa's initiatives to refinance a part of its remaining short-term debt will be successful. The ratings incorporate Fitch's expectation that Famsa will receive additional significant payments from Mr. Garza during 2019 - 2020, which will be directed toward repaying debt.

KEY RATING DRIVERS

Good Performance in Mexican Retail Sales: During the LTM ended September 2017, Mexican sales performed in line with peers and showed a close to 10% increase compared to the same period last year. For 2018, Famsa's main challenge is to retain market share and profitability amid the potential slowdown in the economy during the second half of the year in a market where larger retail chains, such as Coppel and Elektra, also target the low-income segment of the population.

Profitability and Liquidity Initiatives Showing Up: Famsa took actions to improve profitability and liquidity during the year, such as redesigning the personnel structure, reducing costs and expenses, executing maintenance-only capex and carrying out selective store closings. The company also reduced its short-term FX exposure by hedging its senior notes coupons for 2018.

During 2017, Famsa changed to a more conservative origination policy. Salary compensation for certain positions was linked to portfolio quality, promoting new credits with higher quality standards. These initiatives could potentially affect 2018 results positively relative to Fitch's expectations.

Banco Famsa Undergoing Operational Consolidation: Famsa's financial division, Banco Famsa (BAF), has good brand equity and a good competitive position in consumer finance, mainly in northeastern Mexico. BAF's profitability has been improving but its financial performance is constrained by its high funding costs and still high loan-impairment charges, which limit the bank's profitability and internal capital generation. Given BAF's ambitious growth strategy, the institution has required constant capital injections from Famsa. During the 2015 to 2017, Famsa made average annual capital increases of MXN400 million to BAF.

One of BAF's main strengths is its diversified and relatively stable and resilient base of customer deposits. BAF also shows organic growth in its loan portfolio, although its customers' sensitivity to a weak economic environment continues to be a limiting factor.

U.S. Operations Continue under Pressure: U.S. stores' same store sales decreased 10% to 25% during the last two years, beyond the company's expectations. For the LTM ended Sept. 30, 2017, revenues from U.S. operations were MXN1.9 billion, a decrease compared to MXN2.3 billion in 2016. Fitch believes 2018 will remain a challenging year for Famsa's U.S. operations, given the current migration policy that negatively affects Famsa's target market of U.S. Hispanic customers.

The company is redirecting its commercial strategy for the U.S. by targeting second and third generations of Hispanics and improving its social media presence.

Leverage to Recover: Weaker than expected results in Famsa's U.S. operations have led to sustained levels of high leverage. The company ended September 2017 with a lease adjusted debt (excluding banking deposits) to EBITDAR ratio of 6.5x. Fitch expects adjusted leverage to decrease to 6.0x by the end of 2017 and to be around 5.0x by the end of 2018. As of September 2017, Famsa's total debt was MXN8.9 billion, with 28.5% from the Bancomext facility and 28.1% from the senior unsecured notes due in 2020.

DERIVATION SUMMARY

Grupo Famsa's business risk profile is closer to the upper level of the 'B' category when compared to peers. Grupo Famsa is less geographically diversified than Elektra and Unicomer, but it is well positioned in its influence area of Northern Mexico. The company has a lower number of stores than Grupo Elektra (BB/Stable) and Grupo Unicomer

(BB-/Stable).

From a financial risk profile view, Grupo Famsa leans towards the lower level of the 'B' category when compared to peers. The company maintains a weaker financial position in terms of profitability, flexibility and financial structure than Elektra and Unicomer. Grupo Famsa's operating margins are lower but close to Unicomer's, while Elektra has the best operating margins of the three companies. Grupo Famsa ranks below Elektra and Unicomer in terms of credit metrics and liquidity position.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Its Rating Case for the Issuer --Consumption in Mexico decrease during second half of 2018; --Consolidated revenues grow 5% on average annually during 2018 - 2020; --Average EBITDA margin of 9.6% during 2018 - 2020; --EBITDA from the U.S. division is negative in 2017 and neutral to positive in 2018 - 2020; --Average funds from operations (FFO) of MXN5.5 billion per year for 2017 - 2020; --Consolidated debt (excluding bank deposits) of around MXN7.8 billion in 2018 - 2019; --Average capex of MXN205 million during 2017 - 2020; --No dividends payment for 2017 - 2020; --Famsa receives MXN0.8 billion per year from Mr. Garza's guarantee during 2018 - 2020; --BAF requires capital increases of MXN450 million per year from Famsa during 2018 - 2020 to support its growth strategy.

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating Action --Sustained consolidated gross debt to EBITDA (excluding deposits) of 5.0x or below; --Better than expected progress in the cash collection of Mr. Garza's pending MXN4.0 billion guarantee; --A recovery of the U.S. operations; --A trend of decreasing capital injections from Famsa to BAF; --Continued strengthening of the consolidated credit portfolio's quality.

Developments That May, Individually or Collectively, Lead to Negative Rating Action --Failure to receive additional significant payments from Mr. Garza's guarantee; --Additional / unexpected weaknesses in internal operating controls; --Deterioration in BAF's creditworthiness beyond FAMSA's ability to lend support;

--Consolidated gross debt to EBITDA (excluding bank deposits) consistently above 6.5x; --Lower than expected EBITDA generation by FAMSA USA; --Deterioration in the quality of the consolidated loan portfolio.

LIQUIDITY

Liquidity Should Be Adequate: As of September 2017, Famsa's short-term debt (excluding banking deposits) was MXN3 billion, and it has cash holdings of about MXN1.8 billion (most of it at BAF). With the MXN0.3 billion Famsa received during the 4Q17 from Mr. Garza and the cash generated during holiday season, the company was able to improve its liquidity position and reduce short-term debt.

Famsa's short-term debt is mostly made up of short-term Cebures issuances, which the company has been able to roll over, and bank loans with several institutions.

Recovery Analysis

For issuers with IDRs at 'B+' and below, Fitch performs a recovery analysis for each class of obligations of the issuer. The issue rating is derived from the IDR and the relevant Recovery Rating (RR) and notching, based on the going concern enterprise value of a distressed scenario or the company's liquidation value.

Fitch's recovery analysis for Famsa places a going concern value under a distressed scenario of approximately MXN4.8 billion; based on a going-concern EBITDA of MXN864 million and a 5.5x multiple. The going concern value is higher than the liquidation value, which Fitch estimates at about MXN1.9 billion.

The MXN864 million going-concern EBITDA assumption reflects a 36% discount from the current EBITDA generation for the LTM ended September 2017 due to further deterioration of the U.S. operations and -at the same time- an important consumer contraction in Mexico. The 5.5x multiple is the median multiple for retail going-concern reorganizations.

The liquidation value considers no value for cash due to the assumption that cash dissipates during or before the bankruptcy. Fitch applied a 100% discount on the credit portfolio given that most of it is allocated within BAF, which is a regulated entity and has another liquidation process. Fitch has also applied a 50% discount on inventory and PPE as a proxy for the liquidation value of those assets.

With these calculations, Famsa's senior unsecured notes are rated 'B-'/'RR4', indicating average recovery prospects (31% to 50%).

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings: Grupo Famsa S.A. de C.V.

--Long-Term Foreign and Local Currency IDR at 'B-', Stable Outlook; --Long-term National rating at 'BB(mex)', Stable Outlook; --Short-term National rating at 'B(mex);

--USD250 million senior unsecured notes due in 2020 at 'B-'/'RR4'; --MXN0.5 billion short-term Certificados Bursatiles program at 'B(mex)'; --MXN1.0 billion short-term Certificados Bursatiles program at 'B(mex)'.

Contact:

Primary Analyst Maria Pia Medrano Associate Director +52 55 5955 1615

Fitch Mexico S.A. de C.V.

Blvd. Manuel Avila Camacho 88. Piso 10. Lomas de Chapultepec, Ciudad de Mexico

Secondary Analyst

Johnny Da Silva Director +1 212 908 0367

Committee Chairperson Alberto Moreno

Senior Director +52 81 8399 9100

Summary of Financial Statement Adjustments --Lease equivalent debt was adjusted with a 6x multiple --Debt was adjusted to reflect a proxy of retail debt by subtracting Banco Famsa's debt, comprised mainly by banking deposits.

Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email:benjamin.rippey@fitchratings.com.

Additional information is available onwww.fitchratings.com

Applicable Criteria

Corporate Rating Criteria (pub. 07 Aug 2017)https://www.fitchratings.com/site/re/901296

Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016)https://www.fitchratings.com/site/re/887669

National Scale Ratings Criteria (pub. 07 Mar 2017)https://www.fitchratings.com/site/re/895106

Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 21 Dec 2017)https://www.fitchratings.com/site/re/914144

Parent and Subsidiary Rating Linkage (pub. 15 Feb 2018)https://www.fitchratings.com/site/re/10019836

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