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Related Issuers
Rating Action:

Moody's upgrades Hypermarcas ratings to Ba2; outlook is stable

Global Credit Research - 07 May 2013

Approximately USD 750 million in debt securities affected

Sao Paulo, May 07, 2013 -- Moody's Investors Service upgraded Hypermarcas' corporate family and senior unsecured debt ratings to Ba2 from Ba3 on its global scale and to A1.br from A2.br on its national scale. The ratings outlook is stable.

Ratings affected by the upgrade are as follows:

Issuer: Hypermarcas S.A.

Corporate Family Ratings: to Ba2 from Ba3 (global scale) and to A1.br from A2.br (Brazilian national scale)

USD 750 million senior unsecured guaranteed notes due 2021: to Ba2 from Ba3 (foreign currency)

Please see ratings tab on the issuer/entity page on moodys.com for information on Global Scale Rating.

RATINGS RATIONALE

"The upgrade reflects the improvement in Hypermarcas' credit metrics observed over the last few quarters, mainly as a result of its focus on core business assets, organic growth and deleveraging", says Moody's vice-president Marianna Waltz. The company's performance also benefited from the normalization in sales to wholesale clients, following issues with excess inventories in the channel back in 2011, and the improvement in working capital management as a consequence of more restrictive commercial policies and inventory management. Accordingly, the company posted BRL 478 million of adjusted free cash flow after dividends and capex in 2012 and was able to reduce its adjusted gross leverage ratio to 4.3x in December 2012 from 6.8x in the previous fiscal year.

Hypermarcas' ratings are also supported by its solid business model through the pharma and consumer segments, a large and strong portfolio of brands and leading positions in its respective markets. Moreover, we view industry's fundamentals as strong. Both the pharma and consumer segments have grown above the Brazilian GDP over the last several years, boosted by historically low unemployment rates, higher available income and the country's increased middle class.

The potential lack of performance predictability evidenced by Hypermarcas' sharp and unexpected slowdown in 2011 offsets part of the positive attributes. Also, we view some vulnerability in Hypermarcas' generics and branded-generics segments, which combined represent approximately 14% of the company's sales. Although growth potential for these markets is high, pricing power is in the hands of the large drugstore chains, which could translate into more pressured margins.

Our ratings are considering that, despite having historically an acquisitive profile, Hypermarcas will pursue an organic growth strategy over the mid-term. Accordingly, any material acquisition that could put pressure on financial metrics or bring significant integration investments would be seen as a strong credit negative.

Hypermarcas' liquidity is adequate, with cash and equivalents being enough to cover reported short-term debt by 2.5x as of December 2012. In addition, we still see room for further deleveraging, following the BRL 900 million total debt reduction observed during 2012.

The stable outlook reflects our expectations that the company will pursue an organic growth strategy over the next several quarters and remain disciplined with working capital needs and capex disbursements. We are also estimating additional improvements in leverage ratios, supported by both debt reduction and a stronger EBITDA stream.

The ratings could be lowered in the case of a weakening in the company's operating performance, resulting in EBITDA margin consistently below 20% and negative free cash flow generation on few consecutive quarters. Moreover, pressure on the ratings would arise if the company proves unable to sustain leverage below 4.0x or if liquidity deteriorates.

Positive pressure on the rating could develop over time if the company is able to keep generating positive free cash flow in addition to good and consistent organic growth and profitability improvement proves sustainable. This will be the case if free cash flow to debt consistently exceeds 10% and if EBIT / Interest Expense is over 3.2 times. Finally, positive rating pressure depends on company deleveraging to below 3.5x Debt/EBITDA (all figures considering Moody`s standard adjustments) and financial and liquidity policies that remain conservative.

Hypermarcas, founded in 2001 and headquartered in São Paulo, Brazil, operates in the consumer and pharmaceutical businesses in Brazil. With nationwide coverage and a large portfolio of brands, Hypermarcas is one of the largest consumer goods and pharmaceutical companies in the country, with total revenues of BRL 3.9 billion (approximately USD 2.0 billion at current exchange rates) and a Moody´s adjusted EBITDA margin of 28.5% for the fiscal period ended in December 2012. Over 2012, the pharmaceutical segment accounted for 54% of revenues and 64% of gross profit while the consumer segment contributed to 46% of revenues and 36% of gross profit.

The principal methodology used in rating Hypermarcas was the Global Packaged Goods Industry Methodology published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".br" for Brazil. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings."

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Marianna Waltz, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Moody's upgrades Hypermarcas ratings to Ba2; outlook is stable
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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