OREANDA-NEWS. Fitch Ratings has affirmed Grupo Elektra, S. A.B. de C. V.'s (Elektra) Long-Term Foreign - and Local-Currency Issuer Default Ratings (IDR) at 'BB-' and National Long-Term Rating at 'A(mex)'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.

Elektra's ratings are supported by its market position in the retail business as one of the main Mexican department store chains, operational and financial linkage with Banco Azteca S. A. (BAZ; rated 'A+(mex)'/'F1(mex)' ), as well the company's sizable liquidity position and financial flexibility. The ratings also consider the company's foreign exchange exposure of its debt and part of its inventories and the controlling ownership by the Salinas family.

KEY RATING DRIVERS

Strong Market Position

Elektra's market position is supported by the diversification of its operations and the linkage with BAZ, one of the Mexican banks with most granularity in the country. Elektra has a nearly 59-year track record in the commercialization of durable goods, with operations in six Latin American countries including Mexico. The company also has a presence in the U. S. through its subsidiary Advance America (AEA), a payday lending and other short-term financial services provider.

Elektra generates about 72% of the group's consolidated revenues in Mexico (including retail and financial businesses). However, Fitch believes that the retail operation, by diversifying geographically across Latin America, somewhat mitigates revenue concentration.

BAZ Supports Elektra's Ratings

The linkage between Elektra's retail and financial divisions is strong as both depend on another to complete service offerings to customers. The retail division complements its product sales by offering BAZ credit services while BAZ maintains a strong base of customer derived from Elektra and Salinas y Rocha's shoppers.

BAZ's ratings consider the bank's robust position in its main market, consumer loans, giving it a considerable competitive advantage, as well as its still high and stable interest margins. Furthermore, they incorporate the bank's adequate ability to absorb losses, its solid funding structured through an ample, stable, diversified and low-cost base of core customer deposits.

Stable Leverage Expected

Elektra's ratings, which incorporate total adjusted debt to EBITDAR of the retail operation, but excludes the banks in Mexico and Latin America, should be close to 3.5x over the long term. For the latest-12-months (LTM) as of March 31, 2016, the retail division lease adjusted debt-to-EBITDAR (excluding non-cash items) was 3.6x and the adjusted net debt-to-EBITDAR was 3.0x, an improvement from the 4.3x and 3.4x a year before, respectively.

As of March 2016, the retail business' total debt (excluding BAZ and other Latin American financial businesses) was MXN16.5 billion, down from MXN17.7 billion in the same period the previous year. Debt is composed of local and international debt issuances. Liquidity at the retail business is strong which gives the company flexibility to address refinancing needs or take advantage of business opportunities.

Currency Exposure Partially Mitigated

Elektra is exposed to currency variations as approximately 63% of the company's retail debt is denominated in USD. However, this exposure is partially mitigated by Advance America (AEA) cash flows and money transfer fees collected in USD by Elektra. Furthermore, some of Elektra's inventory is related to USD, which could potentially pressure profit margins for some products if this effect is not reflected in price increases or might affect sales volumes if the effect is passed through prices. Nonetheless, Fitch believes the company should have the flexibility to face these effects by changing its sales mix or extending its credit periods to customers, among other measures.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Revenue growth for retail business of 7.8% average per year and EBITDA margin of 18% per year;

--Decrease in AEA revenues for 2016-2017 and EBITDA margin of 11.5% per year;

--Revenue growth for BAZ of 7.5% average per year and EBITDA margin of 11.8% per year;

--Annual growth of 5.8% in banking deposits;

--Accounts receivables portfolio growing at 8.5% per year;

--NPL provisions of MXN8.9 billion per year;

--Capex of MXN3.1 billion annually;

--Dividend payments growing about the Mexican inflation rate;

--Improvements in supplier negotiations and inventory management.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to negative rating actions include sustained adjusted debt to EBITDAR for the retail division above 5.0x, sustained adjusted net debt to EBITDAR for the retail division above 4.0x (including readily available cash equivalents, as per Fitch's calculations), a breach of covenants, as well as deterioration in Banco Azteca's creditworthiness.

Factors that may, individually or collectively, lead to positive rating actions include a sustained decrease in adjusted leverage and adjusted net leverage for the retail division to levels below 3.5x and 2.5x, respectively; a strengthening of the bank's creditworthiness coupled with solid performance of the retail business revenue and cash flow dynamics, as well as greater diversification in banking sources and Fitch's perception of a strengthening in corporate governance.

LIQUIDITY

Elektra's liquidity position is sound. As of March 31, 2016, cash for the retail division was MXN1.8 billion and short-term debt was MXN87 million. During March and April of 2016, Elektra issued MXN5.5 billion of CBs in the local market to refinance maturities due on 2016. Fitch believes that Elektra's MXN15.9 billion marketable financial instruments portfolio could provide additional liquidity if required.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

--Long-Term Foreign - and Local-Currency Issuer Default Rating (IDR) at 'BB-';

--Long-Term National Rating at 'A(mex)';

--Short-Term National Rating at 'F2(mex)';

--USD550 million senior notes due 2018 at 'BB-';

--MXN5.0 billion unsecured CBs (ELEKTRA 16) due 2019 at 'A(mex)';

--MXN0.5 billion unsecured CBs (ELEKTRA 16-2) due 2023 at 'A(mex)';

--Short-Term portion of Certificados Bursatiles program for up to MXN10 billion at 'F2(mex)'.