OREANDA-NEWS. Fitch Ratings has downgraded General Shopping Brasil S. A.'s (GSB) Long-Term Foreign - and Local-Currency Issuer Default Ratings (IDRs) to 'RD' from 'C' and its National Scale rating to 'RD(bra)' from 'C (bra)'. Fitch has also affirmed GSB's USD250 million perpetual notes at 'C/RR4' and its USD150 million subordinated perpetual notes at 'C/RR5'.

The downgrades follow the conclusion of GSB's debt exchange offering. According to Fitch's methodology, the offering imposed a material reduction in terms vis-a-vis the original terms of the exchanged unsecured notes.

KEY RATING DRIVERS

Debt Exchange Outcome Incorporated

GSB recently announced the settlement of the debt exchange offer of the outstanding USD150 million principal amount of 12% perpetual subordinated notes. A total amount of USD34.4 million in perpetual subordinated notes was exchanged, for a total amount of USD8.9 million (representing a 23% acceptance level) in new 10%/12% senior secured PIK Toggle Notes due 2026 and 34,413 Global Depositary Shares (GDS). The GDS represent common shares issued by GSB, with the ratio of 73 common shares for each one GDS. The new notes will also be secured by a second mortgage (hipoteca de segundo grau) on 50.1% of GBS' interest in Parque Shopping Maia.

The low acceptance level of 23% of the debt exchange offer for the subordinated perpetual notes has resulted in no material change in the company's capital structure.

High Leverage, Weakening Liquidity:

Fitch views GSB's capital structure as unsustainable due to excessive financial leverage. GSB's last 12-month period ended March 31, 2016 (LTM March 2016) saw EBITDA of BRL178 million and total debt of BRL2 billion, with net total debt-to-EBITDA of 9.4x. GSB's FCF is expected to remain negative due to excessive cash interest payments during 2016. The company's high leverage and interest rates on its debt has led to high cash interest payments and declining interest coverage.

Quality Assets and Subordination Incorporated in Debt Recovery:

As of LTM March 2016, GSB's total assets were valued at an estimated BRL2.9 billion, with encumbered and unencumbered assets representing approximately 84% and 16%, respectively, of the total assets value. The Recovery Rating (RR) of 'RR4' for the USD250 million perpetual notes reflects the average recovery prospects (the 31% to 50% range) in an event of default. The 'RR5' for the USD150 million subordinated perpetual notes reflects below average recovery prospects of approximately 11-30%.

RATING SENSITIVITIES

The completion of the bond exchange offer has led to a downgrade of GSB's Long-Term Foreign and Local Currency IDRs to 'RD'. A positive rating action may follow after Fitch completes the assessment of the company's credit profile.

LIQUIDITY

GSB has a cash position and short-term debt of BRL47 million and BRL118 million, respectively, and approximately BRL466 million in unencumbered assets as of March 31, 2016. On Sept. 8, 2015, the company exercised its right to defer the payment of interest under its USD150 million 12% perpetual subordinated notes. The interest payment deferral does not constitute an event of default under the indenture.

Without the reversal in GSB's negative FCF trend and absent extraordinary measures to enhance the capital structure, Fitch expects substantial deterioration in GSB's liquidity during 2016 and default risk will remain elevated.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating actions:

General Shopping Brasil S. A. (GSB)

--Foreign currency IDR downgraded to 'RD' from 'C';

--Local currency IDR downgraded to 'RD' from 'C';

--National Scale rating downgraded to 'RD(bra)' from 'C(bra)'.

General Shopping Finance Limited (GSF)

--USD250 million perpetual notes affirmed at 'C/RR4'.

General Shopping Investment Limited (GSI)

--USD150 million subordinated perpetual notes affirmed at 'C/RR5'.