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

RATING ACTION COMMENTARY

Fitch Downgrades Famsa to 'RD'

Tue 02 Jun, 2020 - 5:18 PM ET

Fitch Ratings - Mexico City - 02 Jun 2020: Fitch Ratings has downgraded Grupo Famsa S.A.B. de C.V.'s (Famsa) Long-Term Local and Foreign Issuer Default Ratings (IDRs) to 'RD' from 'CC'. In addition, Fitch has downgraded the long-term national scale rating to 'RD(mex)' from 'CC(mex)' and the short-term national scale rating to 'RD(mex)' from 'C(mex)'. In accordance with the downgrade of Famsa's IDRs to 'RD', Fitch has also downgraded the company's senior notes due 2024 to 'C/RR4' from 'CC/RR4'. A full list of rating actions is detailed below.

The downgrade follows Famsa's missed payment of its 2020 senior notes principal maturity due in June 1, 2020. There is no cure period for repayment. Cross-acceleration clause of the 2024 notes is not automatically triggered by nonpayment of the 2020 notes.

KEY RATING DRIVERS

Missed Principal, No Grace Period: The downgrade re�ects the company's con�rmation that it did not pay the USD59.1 million principal due on June 1, 2020 of its 2020 senior notes, and the absence of a grace period. The company also stated it intends to meet its debt obligations related to its 2024 Secured Notes and its other obligations, including short-term local debt certi�cates (Certi�cados Bursatiles).

2020 Senior Notes Restructuring: On May 29, 2020, Famsa announced it intends to restructure the principal amount of its 2020 Notes before June 23, 2020, by exchanging them with new notes due 2023 or 2024. A completed restructuring of these notes would result in a rating upgrade to a level that re�ects the company's post-restructuring capital structure and business risk. Conversely, a �ling for bankruptcy, administration, liquidation or other formal winding-up procedure would result in a downgrade to 'D', according to Fitch's rating criteria.

Famsa has been pursuing a number of initiatives to improve its �nancial pro�le. However, the increasingly challenged environment along with a still weak portfolio quality, have hindered those initiatives to materialize. Fitch believes the company's operational challenges are high and need to be achieved despite the current macroeconomic scenario.

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

DERIVATION SUMMARY

The 'RD' IDR re�ects Famsa's payment default on its 2020 senior notes due in June 1, 2020.

KEY ASSUMPTIONS

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

--Fitch base case projections for 2020 considers a decline in revenues for a three-month period and then a gradual recovery to levels close to 2019 revenues by 2021;

--Average growth 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.

The recovery analysis assumes that Famsa would be considered a going-concern in bankruptcy and that the company would be reorganized rather than liquidated. Fitch has assumed a 10% administrative claim.

Fitch's recovery analysis for Famsa places a going-concern value under a distressed scenario of approximately MXN3.8 billion; based on a going-concern EBITDA of MXN0.8 billion and a 4.5x multiple. The going concern value is higher than the liquidation value, which Fitch estimates at about MXN1.8 billion.

The going-concern EBITDA estimate re�ects Fitch's view of a sustainable, post-reorganization EBITDA level upon which we base the valuation of the company. The MXN0.8 billion going-concern EBITDA assumption re�ects a 30% discount from average annual EBITDA generation in the last four years. The discount re�ects deterioration of U.S. operations and, at the same time, a signi�cant consumer contraction in Mexico. The 4.5x multiple re�ect the weakened business model and high degree of execution risks under challenging market conditions.

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 regulatedentity 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 new USD80.9 million secured notes due 2024, Famsa's waterfall results in a 61% recovery corresponding to a Recovery Rating of 'RR3'. However, according to Fitch's "Country-Speci�c Treatment of Recovery Ratings Criteria" published February 2020, the Recovery Rating for Mexican corporate issuers is capped at 'RR4', constraining the upward notching of issue ratings in countries with a less reliable legal environment. Therefore, the Recovery Rating for Famsa's 2024 new senior notes is 'RR4'.

RATING SENSITIVITIES

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

A restructure for its 2020 notes and a more sustainable liquidity pro�le.

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

Famsa entering into bankruptcy �lings, administration, liquidation or other formal winding-up procedures.

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

Weak Liquidity: As of March 31, 2020, Famsa's cash position was MXN2.6 billion and short-term debt was MXN3.0 billion in addition to interest obligations. Fitch estimates that around 10%-20% of Famsa's cash is readily available while the rest of it sits at Banco Ahorro Famsa's (BAF) level, which Fitch considers as restricted for purposes of debt repayment at the holding company. We expect the company's retail division to be FCF negative in 2020 due to a weakened performance as consequence of the current challenging operating environment and expected contraction in consumer spending.

SUMMARY OF FINANCIAL ADJUSTMENTS

Gains on �xed asset sales were deducted from the operating income. Financial statements were adjusted to reverse the IFRS 16 effect.

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. 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.

Famsa has an ESG Relevance Score of '5' for Management Strategy due to the number of operational changes that have occurred due to challenges the company has faced in implementing its strategy, which has a negative impact on the credit pro�le and is highly relevant to the rating in conjunction with other factors.

Famsa has an ESG Relevance Score of '4' for Governance Structure due to board effectiveness and ownership concentration, which has an unfavorable impact on the