Grupo Famsa de CV : S&P modifica la perspectiva del Grupo Famsa a negativa debido a desafíos para mejorar su desempeño financiero, calificaciones se mantienen

Grupo Famsa Outlook Revised To Negative On Challenges To Improve Financial Performance, Ratings Affirmed‌‌‌

Juan Camilo Alvarez, Mexico City 52 (55) 5081 4479; juan.camilo.alvarez@spglobal.com

Laura Martinez, Mexico City (52) 55-5081-4425; laura.martinez@spglobal.com

Table Of Contents

Overview Rating Action Rationale Outlook

Ratings Score Snapshot Recovery Analysis Related Criteria Ratings List‌

Grupo Famsa Outlook Revised To Negative On Challenges To Improve Financial Performance, Ratings Affirmed

Overview‌

• Over the past three months, Mexico-based retail company GFamsa has been receiving proceeds from an asset monetization plan to address liquidity needs and reduce leverage. However, the company faces adverse business and macroeconomic conditions that could delay the improvement of its financial risk profile.

• We're revising the outlook to negative from stable and affirming our 'B'

  global scale and 'mxBBB-' national scale corporate credit ratings on GFamsa. At the same time, we're affirming our 'B' and 'mxBBB-'

  issue-level ratings.

• The negative outlook on GFamsa reflects our view that business and financial challenges that the company faces, due to a fierce competition and sluggish economic growth in Mexico, could pressure its margins and constrain its ability to further deleverage its capital structure.‌

  Rating Action

  On May 30, 2017, S&P Global Ratings revised its outlook on the corporate credit rating on Grupo Famsa, S.A.B. de C.V. (GFamsa) to negative from stable. At the same time, we affirmed our 'B' global scale and 'mxBBB-' national scale corporate credit ratings. We also affirmed our 'B' and 'mxBBB-' issue-level ratings on GFamsa's debt. Our recovery rating of '3', which indicates our expectation of meaningful (50%-90%; rounded estimate 50%) recovery prospects for the bondholders in the event of a payment default, remains unchanged.

  Rationale‌

  During the first quarter of 2017, GFamsa received proceeds related to an asset monetization plan, as part of the execution of a guarantee granted by the company's controlling shareholder. As of May 30, 2017, GFamsa has received from this series of transactions more than MXN700 million, which the company used to amortize short-term maturities. The company also expects to receive an additional MXN1.7 billion throughout the rest of the year and another MXN900 million during 2018 to further reduce debt. In our opinion, these initiatives signal the shareholders' commitment to improve GFamsa's capital structure and ensure that it meets all financial obligations in a timely manner.

  Nevertheless, these efforts have not sufficiently improved GFamsa's financial

  Research Update: Grupo Famsa Outlook Revised To Negative On Challenges To Improve Financial Performance,

  Ratings Affirmed

  performance, and its key credit metrics still underperform our expectations for the rating level. In addition, the company continues to face several challenges in light of sluggish economic conditions in Mexico, a less favorable business environment in the U.S., and fierce competition. Although GFamsa has shown progress in improving its liquidity and capital structure, we consider that the company could fall short to revert its deteriorating trend.

  GFamsa's business position is still constrained by its small size in terms of revenues compared with those of regional peers, holds a small market share in Mexico, and has limited geographic footprint and product differentiation.

  However, offsetting factors that support GFamsa's rating are its still strong presence in northern Mexico, as well as a healthy performance of its captive finance division, Banco Ahorro Famsa S.A. Institucion de Banca Multiple.

  Moreover, despite the decline in profitability in the past two years, we still expect the company to maintain EBITDA margins above those of other industry players, at 18-19% in the next two years, reflecting the implementation of some cost reductions and layoffs.

  We have revised our financial risk profile assessment to highly leveraged, because we now expect GFamsa's debt-to-EBITDA ratio to remain above 5.0x and its EBITDA interest coverage ratio below 2.0x in the next 12 months. All of our ratios are adjusted by operating leases, pensions, and captive finance operations. The company has a significant exposure to the dollar-denominated debt, and carries substantial operating leases that pressure leverage metrics. However, the company is analyzing different options to diminish its dollar exposure and we will continue to monitor these strategies.

  Our base-case scenario assumes the following factors:

• Slower GDP growth and higher CPI in Mexico--of about 1.5% and 5%, respectively, in 2017 and 2.0% and 3.5% in 2018, which could pressure consumption trends. However, higher GDP growth and CPI in the U.S.--of about 2.3% and 2.5%, respectively, in 2017 and 2.4% and 2.3% in 2018. We expect the same stores sale (SSS) growth slip to the mid-single digit area from high-single digits in 2016.

• Year-end exchange rate of MXN20.75 per $1 in 2017 and in 2018. However,

  potential further currency fluctuations could have a negative effect on GFamsa's debt and cost of imported goods.

• Revenue growth at 5% in 2017 and 4% in 2018, reflecting price increases

  in line with inflation.

• Working capital needs of around MXN1 billion annually in 2017 and 2018.

• Capex of about MXN150 million in 2017 and in 2018 only for stores renovations.

• No dividend payments.

• Decreasing adjusted debt to between MXN15.5 billion and MXN16.5 billion in the next two years.

  Based on these assumptions, we arrive at the following credit metrics for 2017 and 2018:

• EBITDA margins in a range of 18%-19%;

• Debt to EBITDA significantly above 5.0x; and

  Research Update: Grupo Famsa Outlook Revised To Negative On Challenges To Improve Financial Performance,

  Ratings Affirmed

• EBITDA interest coverage approaching 2.0x.

  Operating leases adjustments

  Like most retailers, GFamsa leases its stores. We treat operating leases as debt-like obligations and adjust our debt and EBITDA metrics for consistency between companies that finance assets using operating leases and those that do so by incurring in debt to purchase the assets. We add the present value of future lease payments to debt, and the lease expense is allocated to interest and depreciation, which we add back to our EBITDA calculation. In the past, we omitted lease payments after year five, which constitutes a misapplication of our criteria. Our current leverage calculations include the correct amount of the company's total contracted leases. If we included such leases in our past leverage calculations, the company's ratings would have remained unaffected because its capital structure was already leveraged.

  Liquidity

  GFamsa's liquidity is less than adequate under our criteria. We expect sources to uses of cash to remain below 1.2x in the next 12 months, reflecting intensive working capital requirements and significant short-term debt maturities, although the company has a track record of good access to the domestic capital markets and to credit from Mexican commercial banks.

  Nonetheless, we expect that under stressed economic conditions and limited credit availability, the company's refinancing sources could be limited.

  Funding and liquidity at the captive division are neutral to the overall liquidity assessment for GFamsa. The credit division's funding sources are fully composed of deposits without exposure to margin calls and other forms of early termination. Moreover, the credit division doesn't have significant borrower concentration.

  Principal Liquidity Sources:

• Cash and cash equivalents of MXN1.1 billion as of March 31, 2017;

• FFO of about MXN1.6 billion for the next 12 months; and

• MXN117 million related to the asset monetizations in April and May 2017.

  Principal Liquidity Uses:

• Debt amortization of MXN3.6 billion for the next 12 months as of March 31, 2017;

• Working capital requirements of MXN2.2 billion for the next 12 months

  (including peak in intra-year working capital); and

• Capital expenditures of about MXN150 million for the next 12 months.

We expect GFamsa's liquidity to improve through the remaining expected proceeds of the asset monetization in the next 12 months. As of March 31 2017, GFamsa's financial covenants are of incurrence, which the company was in compliance.