Fitch Ratings has downgraded Americanas S.A.'s (Americana) Long-Term Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) to 'C' from 'CC', and its Long-Term National Scale Rating to 'C(bra)' from 'CC(bra)'.

Fitch has also downgraded the rating of the senior unsecured global notes issued by its wholly owned subsidiaries JSM Global S.a.r.l. and B2W Digital Lux S.a.r.l. to 'C'/'RR4' from 'CC'/'RR4', and the rating of Americanas' unsecured debentures to 'C(bra)' from 'CC(bra)'.

The downgrade to 'C' follows Americanas' announcement that it has obtained an 'Injunction Relief' from Rio de Janeiro's court establishing, among other protection measures, the suspension of enforceability of all obligations related to financial instruments, such as debt principal and interest. In case Americanas formally announces a restructuring plan, the ratings will be downgraded to 'RD' to reflect a Restricted Default or 'D' if the company files a bankruptcy protection.

Key Rating Drivers

Standstill Obtained: The 'Injunction Relief' allows Americanas not to comply with any of its financial obligations for the next 30 days, beginning Jan. 13. The objective was to preserve cash, avoid acceleration of its debt, arrest of assets and ensure the continuity of the business until company, creditors and shareholders reach an agreement related to a potential debt restructuring and/or capital increase. Fitch considers this event as a standstill as Americanas' payment capacity is irrevocably impaired.

Unsustainable Capital Structure: Americanas' capital structure is deemed to be unsustainable with an addition of an estimated BRL20 billion of new liabilities, as announced by the company a few days ago. This figure compares with BRL3.2 billion of LTM EBITDAR and BRL15.4 billion of shareholder equity at the end of September 2022. The additional liabilities announced nearly double Fitch's calculation of the company's lease adjusted net debt to BRL46 billion, from BRL26 billion.

Limited Financial Flexibility: Americanas' unsustainable capital structure and damaged reputation severely impairs its financial flexibility and ability to cope with operational and financial obligations. Support from creditors will be critical to improving its flexibility. This could come in some combination of waivers of potential covenants breaches, the non-acceleration of financial obligations, and the rolling over of financial facilities. Operationally, the company may struggle to maintain some of its existing suppliers. A material capital injection in a timely manner to avoid default is highly critical, although uncertain. The ability of Americanas to raise cash through asset sale and divestitures will be tested and could potentially minimize creditors' losses.

ESG Affected: Weak Corporate Governance negatively affects Americanas' ratings. The accounting inconsistencies announcement highlights several years of material weakness in the quality of the company's financial statements, as well as the lack of transparency in its financial reporting, as reverse factoring information has not been adequately disclosed in its financial statement notes. The event raises questions about the financial controls of the company, and pressures the company's ability to raise additional debt with banks, capital market and other third parties, including suppliers.

ESG - Corporate Governance: Americanas S.A. for several years has not properly disclosed its supplier financing mechanisms in its financial statements, which is highly relevant to the rating and a key rating driver with a high weight.

Derivation Summary

The current IDRs incorporate the fact that Americanas is currently in a standstill situation and will likely enter a debt restructuring with creditors.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A positive rating action is unlikely and depends upon the company's ability to raise a substantial amount of equity and the company's ability to maintain credit lines.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The formal announcement of a distressed debt exchange or bankruptcy protection process;

Miss payment of any financial obligations after 'Injunction Relief' period.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Challenges to Protect Liquidity: The ability of Americanas' shareholders to inject a material amount of capital into the company is crucial to support working capital needs and to avoid defaulting on financial obligations, but remains highly uncertain. Cash and equivalents were BRL8.8 billion as of Sept. 30, 2022. This figure compares with total adjusted debt of BRL26.4 billion, not considering the potential impact from reverse factoring, but including approximately BRL5.4 billion in rental obligations, as per Fitch's methodology. The company has financial obligations of BRL2.2 billion in the short-term, which includes BRL1.3 billion in debentures and BRL900 million in loans.

Issuer Profile

Americanas is one of the largest diversified retail chains in Brazil, with a wide platform of physical stores, robust e-commerce, fintech, and has just entered into the niche food retail. It is listed on B3, being indirectly controlled by Jorge Paulo Lemann, Carlos Alberto Sicupira and Marcel Telles.

Summary of Financial Adjustments

Fitch uses a multiple of 5x to capitalize Brazilian companies leasing adjusted debt;

Fitch includes the factoring of account receivables on debt. Fitch adjusts short-term and long-term marketable securities back to cash and equivalents. Fitch considers the financing to the marketplace sellers as finance activity. Applying methodology, the finance service activity has a debt/equity leverage ratio of 2.0x. The asset of the financial service activity corresponds to the receivables related to the marketplace business, so, half of this asset is financed by debt, which is deconsolidated from total debt.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Americanas S.A. has an ESG Relevance Score of '5' for Corporate Governance and Financial Transparency due to the inconsistencies of reporting reverse factoring in its financial statements., which has a negative impact on the credit profile, and is highly relevant to the rating.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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