Grupo Famsa B de C : Fitch downgrades Famsa to 'D'

RATING ACTION COMMENTARY

Fitch Downgrades Famsa to 'D'

Thu 02 Jul, 2020 - 8:56 PM ET

Fitch Ratings - Mexico City - 02 Jul 2020: Fitch Ratings has downgraded Grupo Famsa, S.A.B. de C.V.'s (Famsa) Long-Term Local- and Foreign-Currency Issuer Default Ratings (IDRs) to 'D' from 'RD'. At the same time, Fitch has downgraded Famsa's National Long-Term Rating to 'D(mex)' from 'RD(mex)' and the National Short-Term Rating to 'D(mex)' from 'RD(mex)'. In addition, Fitch has also af�rmed the company's senior notes due 2024 at 'C' and revised the Recovery Rating to 'RR5' from 'RR4'. A full list of rating actions is at the end of this commentary.

The downgrade follows Famsa's failure to pay a short-term Certi�cados Bursátiles maturity due July 2, 2020. Fitch also believes Banco Ahorro Famsa's (BAF) license cancellation is a major operational concern for Famsa given the importance it had for the retail business. Despite Famsa's intentions to serve its �nancial obligations, the ceasing of its banking operations has affected the company's liquidity. Fitch will be closely following the company's developments regarding operations and �nancial sustainability.

KEY RATING DRIVERS

Chapter 11 Filing: Famsa �led for Chapter 11 on 26 June 2020 to restructure its 2020 Notes. The company presented the agreement it had with the 2020 Notes' bondholders to restructure those notes by exchanging them with new notes due in

2023 or 2024. Fitch believes the events related to BAF add uncertainty to Famsa and the outcome of the prepackaged Chapter 11 �ling.

ESG -- Governance: Famsa has an ESG Relevance Score of 5 for Management Strategy because of the number of operational changes that have occurred due to challenges the company has faced in implementing its strategy. This has a negative effect on the credit pro�le and is highly relevant to the rating in conjunction with other factors. Famsa also has a score of 5 for Financial Transparency due to a record of material differences from audited �nancial statements and its reported �gures. This has a negative effect on the credit pro�le and is highly relevant to the rating in conjunction with other factors.

DERIVATION SUMMARY

The rating has been downgraded to 'D'.

KEY ASSUMPTIONS

Fitch's Previous Key Assumptions Within Our Rating Case for the Issuer Included:

-- Consolidated revenue declines by 24% during 2020 and then an average of 6.7% annually in 2021‒2023;

-- Average EBITDA margin (calculated pre-IFRS 16) of 3.6% for 2020 and 7% during 2021‒2023;

-- Consolidated debt, excluding bank deposits and operating leases, of around MXN7.4 billion on average for 2020-2023;

• -- Average annual capex of MXN237 million in 2020-2023;

• -- No dividend payments for 2020-2023;

• -- BAF sells assets for MXN0.5 billion in 2020 and MXN1.0 billion in 2021.

RECOVERY ASSUMPTIONS

For issuers with IDRs of '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 assumes a liquidation value of approximately MXN1.7 billion because of Famsa's current situation. Fitch has assumed a 10% administrative claim.

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 property, plant and equipment as a proxy for the liquidation value of those assets.

For the USD80.9 million secured notes due 2024, Famsa's waterfall results in a 17% recovery corresponding to a Recovery Rating of 'RR5'. Therefore, the Recovery Rating for Famsa's 2024 senior notes is 'RR5'.

RATING SENSITIVITIES

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

A positive rating action may follow upon the completion of Famsa's 2020 Notes restructure, a more sustainable liquidity pro�le and after the assessment of the company's new operating pro�le.

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

-- The company is rated 'D', and therefore, there can be no negative rating action on the IDRs.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (de�ned 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 (de�ned 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-speci�c best- and worst-case scenario credit ratings, visithttps://www.�tchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Liquidity is compromised.

SUMMARY OF FINANCIAL ADJUSTMENTS

Financial statements were adjusted to revert the IFRS 16 effect.

Gains on asset sales were subtracted from operating income.

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

Famsa has an ESG Relevance Score of 5 for Management Strategy because of the number of operational restructures that have occurred due to challenges the company has faced in implementing its strategy.

Famsa has an ESG Relevance Score of 5 for Financial Transparency due to a record of material differences from audited �nancial statements and the company's reported �gures.

Famsa has an ESG Relevance Score of 4 for Governance Structure due to board effectiveness and ownership concentration, which has an unfavorable effect on the credit pro�le and is relevant to the rating in conjunction with other factors.

Famsa has an ESG Relevance Score of 4 for Group Structure as that the company presents a below-average transparency of related-party transactions. This has a negative effect on the credit pro�le and is relevant to the rating in conjunction with other factors.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, 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, visitwww.�tchratings.com/esg.

RATING ACTIONS

ENTITY/DEBTRATING

RECOVERY

Grupo Famsa, S.A.B. de C.V.

LT IDRD

DowngradeLC LT IDR

D

Downgrade

Natl LTD(mex)

DowngradeNatl ST

D(mex)

Downgrade

• • senior unsecured

LTC

Af�rmed

RR5

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