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11 Jan 2011
Approximately USD 1,000 million in debt securities affected
Sao Paulo, January 11, 2011 -- Moody's Investors Service ("Moody's") assigned a Baa3 foreign currency
rating to the proposed senior unsecured notes due 2021 of up to USD1 billion
to be issued by Cencosud. S.A. ("Cencosud") and fully
and unconditionally guaranteed by Cencosud Retail S.A. The
rating outlook is stable. Proceeds will be used principally to
refinance debt at the operating subsidiary level.
Senior Unsecured Regular Bond/Debenture, Assigned Baa3
The Baa3 rating of the notes is supported by the company's large
operating scale as one of South America's largest retailers,
its solid positions across different retail concepts in many of its key
markets, and good business and geographic diversification"
according to Filippe Goossens, Senior Vice President of Moody's
America Latina. It also reflects Cencosud's focus on the
defensive food retail business, its generally competitive margins,
its track record of profitable growth over the past decade and its potential
for further growth and margin expansion going forward. The company
also benefits from the added financial flexibility provided by the sizeable
real estate portfolio in its shopping center division.
"Credit positives are partly offset by Cencosud's return to
an ambitious expansion program which will result in free cash flow being
negative over the coming years. As a result, credit metrics
could come under pressure if earnings fall short of expectations",
according to Filippe Goossens. While falling recently to a level
commensurate with the Baa3 rating category, the company's
leverage remains relatively high compared to similarly positioned companies.
Cencosud is also exposed to above average sovereign risk through significant
operations in its second largest market, Argentina.
Furthermore, Moody's estimates that 35% of Cencosud's
total debt resides at its wholly-owned operating subsidiaries.
When combined with sizeable trade payables, this results in a meaningful
degree of structural subordination which the company has attempted to
mitigate through an upstream guarantee from Cencosud Retail S.A.,
its principal Chilean retail operating subsidiary (but which excludes
its Easy home improvement unit) and a commitment to reduce funded debt
at the operating subsidiaries to 20% of total debt by the end of
2011. At the end of the third quarter 2010, Cencosud Retail
S.A. accounted for 41% of the total revenues and
55% of EBITDA. As Cencosud continues to aggressively grow
its retail operations outside of Chile, the support of the guarantee
will decrease resulting in a higher degree of potential structural subordination.
The rating outlook is stable, based on our expectation of continued
improvements in operating trends over the next several quarters as economic
conditions continue to firm up.
The rating could be upgraded over time if positive operating performance
trends and prudent financial policies result in stronger credit metrics
on a sustainable basis, such that adjusted Debt/EBITDA falls below
3.0 times (vs. 3.4 times as of LTM 3Q10).
An upgrade would also require a material, possibly gradual,
reduction of Argentine country risk and its importance to the overall
The rating could come under pressure if operating performance comes in
weaker than anticipated, credit metrics weaken materially over a
prolonged period, such that adjusted Debt/EBITDA rises above 4.0
times. Increasing negative free cash flow, failure to promptly
address high near term debt maturities and access new international funding
sources, and increased political risk in Argentina if the company
is unable to reduce the relative contribution of its retail and real estate
operations in that country in a meaningful manner could also result in
negative rating pressure. The rating for the senior notes could
come under pressure if the proportion of debt at the unguaranteed subsidiaries
did not decline towards 20% of total debt.
The last rating action was on 6 December 2010 when Moody's assigned
a Baa3 senior unsecured issuer rating to Cencosud S.A.
The principal methodology used in this rating was Global Retail Industry
published in December 2006.
Based in Santiago, Chile, Cencosud S.A.,
is one of South America's largest retailers, with operations
in Chile, Argentina and more recently also in Peru, north
and central parts of Brazil and Colombia. The company operates
multiple retail formats, including a food retail business which
accounts for around two thirds of revenues, and sizeable home-improvement
and department store operations. Cencosud also is a leading operator
of shopping centers in Argentina, Chile and Peru, runs a sizeable
proprietary credit card business that supports its retail operation and
owns a small consumer-oriented bank, Banco Paris.
Cencosud is controlled by its founder and chairman Horst Paulmann and
his family, who combined own a 65.3% economic interest
in the company.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
and public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Senior Vice President
Corporate Finance Group
Moody's America Latina Ltda.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's America Latina Ltda.
Moody's assigns Baa3 foreign currency rating to Cencosud S.A.'s proposed debt offering
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