OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to El Puerto de Liverpool, S. A.B. de C. V.'s (Liverpool) USD500 million senior unsecured notes due 2026. The notes will be guaranteed by its subsidiary Distribuidora Liverpool, S. A. de C. V and will rank pari passu with all of Liverpool's and its subsidiary unsecured and unsubordinated indebtedness. Net proceeds from the issuance are expected to be used for general corporate purposes, including capital expenditures and a portion of the purchase price of Liverpool's recent acquisitions. A full list of the company's ratings is provided at the end of this release.

In Fitch's view, Liverpool's recent acquisitions will strengthen the company's business position by expanding its target market and geographic footprint, positioning it as a relevant player within the Latin American region in terms of scale and purchasing power. Fitch revised Liverpool's Rating Outlook to Stable from Positive on Aug. 11, 2016, reflecting Fitch's view that a rating upgrade for Liverpool will be unlikely in the next 12 months as the company will increase its debt levels enough to fund the acquisition of Suburbia and a percentage of Ripley Corp. S. A.'s (Ripley) equity. Fitch believes these agreements will not have an impact on Liverpool's 'BBB+' rating given its solid balance sheet and current low leverage.

The addition of Suburbia to Liverpool's portfolio should strengthen its business position in the medium - to low-income segment, create opportunities to capture synergies, and open the possibility to expand its financial business to Suburbia. On Aug. 10, 2016, Liverpool announced it reached an agreement with Wal-Mart de Mexico, S. A.B. de C. V. (Walmex) to acquire 100% of Suburbia for MXN19 billion. The transaction is expected to close during the first quarter of 2017 and needs approval by the antitrust commission. The company plans to fund the MXN19 billion-transaction with a combination of cash and debt and Fitch does not foresees any material acquisition until leverage returns to historical levels.

In July 2016, Liverpool entered into an agreement to make a public bid for at least 25.5% and up to 100% of the traded shares of Ripley. The value to be paid could range between USD310 million and USD580 million, depending on the percentage of the public shareholders' acceptance. Fitch's base case takes into account that Liverpool will get a minority stake of Ripley and will account for this investment by the equity method.

KEY RATING DRIVERS

Liverpool's ratings reflect the company's leading business position in Mexico, geographic diversification, and multiple store formats, all of which support its consistently positive operating cash flow generation and ample financial flexibility. In addition, the consumer finance division and the real estate portfolio strengthens its existing retail operations. For the first six months of 2016, sales through own credit cards accounted for approximately 42.6% of consolidated revenue and Liverpool owns approximately 83% of its retail space.

Strong Market Position

Liverpool is the leader in the middle-, middle-high and high-income segment of department stores in Mexico. During the last 12 months (LTM) ended June 30, 2016, the company's retail revenues reached MXN83.5 billion, 13.6% above 2015. As of June 2016, the company operates 113 stores across 57 cities throughout Mexico: 80 under the name of Liverpool, 29 Fabricas de Francia, and four stores in the format Liverpool Duty Free. Around 80% of total units are owned by Liverpool.

The company also has 25 shopping malls operating in 16 cities and owns a non-controlling 50% stake in Regal Forest Holding Co., which has 14 different store brands selling consumer durable products in 20 countries around Central and South America and the Caribbean. Regal Forest investment is recorded under the equity method of accounting.

Format and Business Diversification Provides Stable Cash Flow:

Liverpool has a diversified revenue base; for the LTM ended June 2016, 87.3% of total revenues were contributed by its retail segment, 9.7% from its financial services division and 3.1% from real estate. During the first half of 2016, retail total segment revenues grew 13.6% compared to the same period the year before, while same store sales (SSS) grew 9.1%, slightly below the average of 9.2% average for department store growth cited by the Asociacion Nacional de Tiendas de Autoservicio y Departamentales (ANTAD). Fitch believes that the company is well positioned to continue its business strategy given the current demographic and socioeconomic fundamentals in Mexico, with a growing middle class, low inflation rates, higher real wages and higher remittances due to the peso depreciation.

Consumer Credit Division Supports Retail Business

Fitch positively factors into Liverpool ratings the funding of its credit card portfolio which has been historically with internal generated funds and has presented an effective loan portfolio management through the business cycles. During challenging economic times with high unemployment rates, Liverpool has restricted its credit offering and the limits of existing customers' credit lines to avoid excessive portfolio growth and high non-performing loan (NPL) rates. The company has an average NPL index of 3.7% during the last five years and it has not been above 5% of the total gross loan portfolio. As of June 30, 2016, Liverpool had approximately 4.1 million credit card accounts. Its net credit card portfolio of MXN28.7 billion covers its debt by 2.0x and considering Fitch's total pro forma debt related to acquisitions, the same portfolio would cover it by 0.7x.

Recent Acquisitions Pressure Liverpool's Credit Metrics:

Fitch believes Liverpool's credit metrics, after the acquisition of Suburbia and investment in Ripley, will recover their historical levels in the medium term given its retail expertise and consistent operating and financial track record. As of June 2016, Liverpool's adjusted leverage measured as total adjusted debt/EBITDAR was 1.2x. According to Fitch's estimations, debt is expected to rise in 2017 to nearly MXN40 billion from the MXN14.5 billion in June 2016, resulting in adjusted leverage of 2.6x in 2017, after the Suburbia and Ripley's acquisitions.

FX Exposure Partially Mitigated

Fitch estimates that around half of Liverpool's merchandise is exposed to exchange rates. Merchandise exposure is mitigated by re-pricing some articles after inventory restocking; a proportion of exchange rate movements are absorbed by the final customer. The company currently has USD300 million of senior notes due in 2024. This USD-denominated debt has hedges in place that cover interest and principal, which are currently below the market spot rate. The upcoming USD500 million senior notes to be issued will also be hedged, covering foreign exchange rates fluctuations.

Adequate Liquidity & Debt Maturity Schedule

The company has good liquidity backed by its cash on hand and cash flow generation; also, the current loan portfolio covered total debt as of June 2016 by about 1.4x. Liverpool's next debt maturity is a local bond for MXN2.1 billion due on March 2017. Liverpool has good access to domestic and international capital markets if needed, which further strengthens its financial flexibility. In addition, the company's large portfolio of owned stores and shopping malls provides solvency through an important base of unencumbered assets.

KEY ASSUMPTIONS

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

--Liverpool gets a 47% stake of Ripley in 2016 with a combination of cash and debt.

--Consolidation with Suburbia takes place in 2017; the transaction is funded 100% with debt.

--Revenue growth in the mid-single digits during 2018-2019.

--EBITDA margin between 15%-16%.

--Average capex around 7.2% of revenue in 2016-2019.

--Dividends in line with company policy of 15% of previous year's net income.

--Adjusted debt/EBITDAR ratio to remain below 3.0x.

RATING SENSITIVITIES

Factors that individually, or collectively, could result in a negative rating action include: an expansion strategy financed primarily with debt, a sustained adjusted leverage ratio (gross adjusted debt/EBITDAR) above 3.0x, consistently negative free cash flow (FCF) below Fitch's expectations, a substantial deterioration in non-performing receivables (more than 90 days), and lower profitability margins.

Factors that individually, or collectively, could result in a positive rating action include: a successful integration with Suburbia, strong operating cash generation, a strengthening in the company's credit profile through a funds from operations (FFO)-adjusted leverage (adjusted debt/FFO) below 2.0x and adjusted debt/EBITDAR ratio below 1.5x, consistently positive FCF throughout the business cycle, and geographic diversification.

FULL LIST OF RATING ACTIONS

Fitch currently rates Liverpool as follows:

--Long-Term Foreign and Local Currency IDRs 'BBB+', Stable Outlook;

--Long-Term National rating 'AAA(mex)', Stable Outlook;

--Short-Term National rating 'F1+(mex)';

--USD300 million senior notes due 2024 'BBB+';

--Long-term Certificados Bursatiles issuances (LIVEPOL 08,10,10U,12,12-2) 'AAA(mex)';

--Short-term Certificados Bursatiles program for up to MXN5 billion 'F1+(mex)'.