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Global Credit Research - 06 Dec 2010
Sao Paulo, December 06, 2010 -- Moody's Investors Service ("Moody's") assigned a Baa3 local currency senior
unsecured issuer rating to Cencosud S.A. ("Cencosud").
This is the first time Moody's has assigned a rating for Cencosud.
The rating outlook is stable.
"The Baa3 rating 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", Mr. Goossens said.
"These 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 for 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.
With revenues in excess of USD 11.0 billion, Cencosud is
the second largest publicly traded retailer in South America having grown
at a rapid pace both organically as well as through a number of large
acquisitions. Today, Cencosud is a fairly diversified company
with several retail formats, real estate and financial services
operations, having established a solid presence in Chile,
Argentina, Peru and certain parts of northern and central Brazil
with GBarbosa and Bretas. In its retail operations, the company
competes with various large retailers such as Wal-Mart, Carrefour,
CBD and Falabella whereas for its shopping centers its faces a number
of several large operators (such as Mall Plaza and Parque Arauco in Chile
and the IRSA Group in Argentina). While market dynamics and competitive
challenges differ significantly between countries, Cencosud has
consistently maintained #1 or #2 market shares in most of its
retail businesses. We note that international competitors have
had a mixed track record in the region, demonstrating that local
market knowledge plays an important role in being a successful operator.
Cencosud exhibited solid profitability over the past years, with
consolidated EBITDA margins in the 7-8% range and divisional
margins comparable with peers in the region. While under pressure
during the economic downturn in 2008/9, operating performance has
picked up significantly in recent quarters with margins returning to their
pre-crisis levels, as consumption trends improved and cost
reduction efforts started in 2009 began to bear fruit. For the
nine months ended September 30, 2010 (9M10), revenues and
reported EBITDA came in at CLP4,377 billion (USD8.49 billion)
and CLP373.5 billion (USD725 million), respectively,
up 10% and 36% in local currency vs. 9M09.
At the same time, EBITDA margin was 8.5%, up
1.66 percentage points from the prior year's period.
Earnings also recovered on an annual basis, with reported LTM 3Q10
EBITDA reaching CLP506 billion (USD970 million), or 8.8%
over sales, meaning that margins returned to 2006 and 2007 levels
after a weak 7.1% in 2008 and 7.3% in 2009.
Results in 2008 and 2009 were impacted by the acquisitions of Wong and
Gbarbosa as well as the financial crisis. Since 2010 the company
has started to show the benefits from its integration model which it started
to implement during 2009.
Over the near-to-medium term, we expect Cencosud to
resume its organic store growth in most of the markets in which it operates
retail concepts, focus on the integration of recent acquisitions
in Brazil and Peru, and continue to build out its recent entry into
the Colombian home improvement market. Additionally, we expect
management to continue to focus on extracting additional synergies from
its current operations, principally by continuing to implement its
new shared services platform. While acquisitions will likely be
more of an add-on nature following Bretas, we cannot rule
out opportunistic larger debt financed acquisitions. Through this
expansion strategy, we expect that Cencosud over time will continue
to reduce its exposure to the uncertain Argentinean market, the
base for its largest operations outside of Chile
Given its renewed focus on growth following a brief hiatus during the
financial and economic crisis, we expect Cencosud to be cash flow
negative again and to finance capex needs in excess of internal cash generation
with debt, while maintaining leverage at least close to current
levels as it grows its earnings base over time. We expect the company
over time to bring its capital structure more in line with those of other
investment grade issuers by accessing new international longer term funding
sources and improve its liquidity.
Cencosud's lease-adjusted credit metrics have improved over
the past quarters as performance picked up and the company repaid debt.
Nevertheless, adjusted metrics are weak for similarly positioned
Baa3-rated companies in the region. For the 12 months ended
June 30, 2010, adjusted Debt/EBITDA was 3.6 times (as
measured in Chilean pesos), down from 4.3 times in 2009,
while adjusted EBITDA/Interest rose to 5.9 times from 4.4
times. We believe these metrics are elevated due to the group's
sizeable real estate and financial services businesses, which tend
to operate with higher leverage. In our calculation we have used
gross debt-based credit metrics because we expect cash reserves
over the coming years to be largely limited to a modest liquidity buffer.
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. 3.6 times as of LTM 2Q10).
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 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, and parties not involved in the
ratings, public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
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
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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 senior unsecured issuer rating to Cencosud S.A.
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