OREANDA-NEWS. Fitch Ratings has affirmed Office Depot de Mexico S. A. de C. V.'s (ODM) Long - Term Local Currency (LC) and Foreign Currency (FC) Issuer Default Ratings (IDRs) at 'BB+'. The Rating Outlook has been revised to Negative from Stable. A full list of rating actions follows at the end of this press release.

The revision of the Rating Outlook to Negative reflects the adverse impact of currency depreciation in ODM's leverage. As of June 2016, adjusted debt to EBITDAR ratio was 4.5x, above Fitch's expectations for the company's current rating. Failure to reduce adjusted debt to EBITDAR to 3.5x over the next 12 - 24 months should result in a downgrade. If ODM's consolidated operating results meet Fitch's EBITDA expectations and there is no further foreign exchange depreciation within the next 12 - 24 months, the Outlook could be revised to Stable as it would positively impact leverage ratios.

ODM's credit quality continues to reflect its leadership position in the office products super-store segment, diversified geographical footprint and consistent cash flow generation. The ratings also consider ODM's sound liquidity position and the expectation that the company will successfully integrate and align the recent acquisitions into its operations and financial results.


Leverage Above Expectations

ODM's leverage ratios are high for the current rating level. For the latest-12-months (LTM) ended June 2016, Adjusted Debt to EBITDAR was 4.5x and Debt to EBITDA was 3.5x, above Fitch expectations of 3.5x and 2.5x, respectively. The reason for the company's current leverage is due to the effect of the depreciation of the Mexican peso versus USD. ODM's debt is mainly denominated in USD and the principal is not hedged while cash flow is generated in local currency. Fitch expects ODM's leverage to improve as synergies and margin improvements from the recent acquisitions materialize.

Strong Business Profile

ODM's operating profile is supported by its national retail presence in Mexico, operations in Central and South America, mix of large corporate customers, small businesses and consumers. It has a leading position among Mexican office supply super stores and non-Mexican sales represent about 26.4% of total revenues. In addition, its wide distribution network, preponderance of cash sales and mostly local sourcing of inventory, further supports ODM's business profile.

Stable Cash Flow Generation

The company has shown consistent growth over the past 13 years, with solid EBITDA generation even during economic downturns. Same store sales (SSS) recovered during 2015 (6.3%) and the first semester of 2016 (6.8%) due to improved consumer confidence, low inflation rates and increasing real wages, while total sales increased by 29.5% and 29.4%, respectively, due to the consolidation of Grupo Prisa (Prisa) and RadioShack de Mexico (RSM). During the LTM ended June 2016, EBITDA margins declined by nearly 240 basis points (bps) to 8.0% compared to full year 2014 (10.4%), a result of the acquired companies' lower margins. Fitch expects ODM's EBITDA margin to be around 9.5% in the medium term.

Growth Through Targeted Acquisitions

During 2015, ODM acquired Grupo Prisa (Prisa), a Chilean office supply company, as well as RadioShack de Mexico (RSM). These acquisitions have increased revenues by about 30%. Fitch believes Prisa adds geographical diversification to ODM, while RSM could see improved margins and market share under ODM's stewardship.

The Mexican office supply and small electronics retail industry is very fragmented, with the potential for consolidation by big players such as ODM. Going forward, ODM will also pursue a robust growth strategy, with an estimated 40 store openings per year on average. Fitch expects these openings and any upcoming acquisitions to be funded with internally generated cash flow, as the company has done in the past.


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

--Average revenues growth of 8.3% per year during 2016 - 2019;

--EBITDA margins close to 9.2% on average during 2016 - 2019;

--Senior notes amount affected by exchange rate fluctuations;

--Exchange rate of MXN18.7 per USD for 2016, MXN18.17 for 2017 and MXN18.0 for 2018 - 2019;

--CFO generation above MXN1.0 billion per year;

--Average annual capex of MXN798 million during 2016 - 2019;

--Cash dividend payments of 50% of net income.


Factors that could be detrimental to credit quality include:

--EBITDA margin trend below Fitch's expectations;

--Sustained negative SSS over time;

--Debt-financed acquisitions;

--Further devaluation of the Mexican peso vs. the U. S. dollar; --Other factors that drive adjusted debt to EBITDAR above 3.5x; debt to EBITDA above 2.5x and FFO adjusted leverage (Debt adjusted by leases / Funds from Operations) above 4.5x within the next 12 - 24 months.

No positive rating actions are currently contemplated over the near term. A revision of the Rating Outlook to Stable can be contemplated if ODM manages to improve its adjusted leverage ratio at or under 3.5x and continues showing positive SSS while maintains its leadership in the office supply market.


ODM's liquidity position is sound. As of June 2016, ODM had a cash and marketable securities balance of MXN654 million and short-term debt of MXN19 million (incurred by Prisa before the acquisition). No material debt maturities are due until 2020.

Free cash flow (FCF) has been positive over the past five years, and Fitch expects it to remain positive going forward. Estimated capex in the medium term is around MXN800 million per year and dividend payments should be up to 50% of net income according to covenants.


Fitch has affirmed the following ratings:

Office Depot de Mexico S. A. de C. V.

--Long-Term Foreign Currency IDR at 'BB+';

--Long-Term Local Currency IDR at 'BB+';

--USD350 million senior notes due 2020 at 'BB+'.

The Rating Outlook is Negative.