Fitch Ratings has downgraded Americanas S.A.'s (Americana) Long-Term Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) to 'CC' from 'BB', and its Long-Term National Scale Rating to 'CC(bra)' from 'AA+(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 'CC'/RR4 from 'BB', and the rating of Americanas' unsecured debentures to 'CC(bra)' from 'AA+(bra)'.

The downgrade to 'CC' follows Americanas' disclosure that inconsistencies were detected in accounting entries that reduced the balance of its suppliers' accounts over several years by an estimated BRL20 billion. These accounting inconsistencies relate to reverse factoring. These additional liabilities on a pro-forma basis would increase Fitch's net adjusted debt/EBITDAR ratio for Americanas to 11.9x for the LTM ended Sept. 30, 2022 from the previously calculated ratio of 5.5x.

Fitch believes it is likely that Americanas will enter a standstill agreement with its creditors given the unsustainable capital structure that now exists and the reputational damage that has occurred. The company's ratings would be downgraded to 'C' if this should transpire.

Key Rating Drivers

Unsustainable Capital Structure: Americanas' capital structure is deemed to be unsustainable with an addition of an estimated BRL20 billion of new liabilities. This figure compares with BRL3.2 billion of LTM EBITDAR and BRL15.4 billion of shareholder equity at the end of September 2022. The new liabilities 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 uncertain.

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.

Derivation Summary

The current IDRs derive from the relevant fact announced and the very likely process standstill in the near future.

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:

Entering into a standstill agreement;

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

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 majority of the BRL2.0 billion of short-term debt relates to account receivable factoring.

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 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.

(C) 2023 Electronic News Publishing, source ENP Newswire