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Rating Action:

Moody's assigns a Baa1.mx rating to Controladora Comercial Mexicana

 The document has been translated in other languages

08 Apr 2011

Mexico, April 08, 2011 -- Moody's de México, S.A. de C.V. (Moody's) assigned an Baa1.mx (Mexican National Scale) corporate family rating to Controladora Comercial Mexicana, S.A.B. de C.V. (CCM). Moody's also affirmed the Ba3 corporate family rating and the senior secured ratings previously assigned to around USD1.6 billion in various bonds and loans due from 2012 to 2018. The rating outlook is stable.

Ratings assignment:

- Corporate Family Rating (CFR): Assigned Baa1.mx (Mexican National Scale) rating; affirmed Ba3 rating

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 to 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 ".mx" for Mexico. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance August 2010 "Mapping Moody's National Scale Ratings to Global Scale Ratings."

Ratings Rationale

"The Baa1.mx / Ba3 ratings balance the benefits of a fairly defensive business profile typical for a food retailer and CCM's significant market position as Mexico's third largest food retailer with the longer term challenge of securing its market position in an increasingly competitive local retail sector and the company's high financial leverage", said Alonso Sánchez, Assistant Vice President and Analyst at Moody's. During the debt restructuring process started in late 2008 and continued through 2010, CCM's operations deteriorated temporarily and its expansion plans were curtailed as compared to periods before the bankruptcy filing in October 2008, weakening its competitive position in the medium term. In the process, the company's Moody's-adjusted leverage increased significantly to 5.6x in FY 2010 from 1.8x in FY 2007.

With 2010 revenues of MXN55.7 billion (USD4.4 billion), CCM is a relevant player in the Mexican food retail market where it has been the #3 largest food retailer in the country, following Walmart and Soriana. Currently, CCM holds around 12% market share measured within the four largest players. This solid position historically provided CCM with a good operating leverage and significant clout with suppliers and allowed the company to partly absorb the negative impact of its insolvency in October 2008 and the subsequent restructuring that ended in 2010.

Since October 2008, when the company defaulted on its debt payments and filed for bankruptcy protection under Mexican law (Ley de Concursos Mercantiles), CCM started a restructuring process with its creditors that concluded in December 2010. As a result of this process, the company reduced significantly its store expansion and Capex, relative to depreciation expense, fell to 0.7x in 2008 from 3.5x in 2007 (in 2010 it was 0.6x). The underinvestment in store refurbishment may pressure the company's competitive position, especially in the light of a more aggressive competitive environment. CCM has a strong foothold in the Mexico City metropolitan area and the central region of the country. However, Moody's believes that CCM's market position will be challenged going forward, especially in the light of a more aggressive competitive environment, with Walmart's recently announced plan to open 365 stores in Mexico during 2011 and Chedraui's (#4 player) growth above peers in recent years, which has reduced its gap with CCM.

After the default in 2008, CCM's credit metrics deteriorated significantly with leverage measured as Debt / EBITDA increasing to 6.0 x in 2008 from 1.8x in 2007 on a Moody's-adjusted basis. As of December 2010, credit metrics remain weak with leverage at 5.6x and FCF/Net Debt at 2.8%. However, we expect that metrics will gradually improve as the company uses excess cash from operations and potential sell out of non-core assets to prepay debt. The restructured debt agreements have a number of limitations associated with dividend payouts, related-parties transactions, asset sales, intercompany loans and derivatives transactions. These limitations reduce the company's financial flexibility but help offset the currently weak credit metrics.

The stable rating outlook assumes continued solid operating trends as shown by margin stability and continued flat or growing same store sales, with credit metrics improving slightly as CCM gradually pays down its debt with excess cash flow from operations and potencial sell out of non-core assets. The cushion for negative deviations is limited because current credit metrics are weak and the company has limited financial flexibility under its credit agreements.

An upward ratings pressure could occur if the company reduces its leverage to below 4.5x adjusted Debt/EBITDA from current 5.6x, while at least maintaining flat Same Stores Sales growth. A positive ratings pressure will require that debt reduction be coupled with a revamp of the company's capex so that it can further protect its market position.

Going forward, ratings could come under pressure if Same Store Sales growth is negative or operating margins deteriorate, preventing CCM from reducing debt as planned and resulting in weakening credit metrics. Negative pressure could occur if the company is unable to at least gradually reduce its current adjusted Debt/EBITDA in the foreseeable future.

The last rating action was on March 9, 2011 when Moody's assigned a Ba3 corporate family rating to CCM. The principal methodology used in this rating was Global Retail Industry published in December 2006.

Controladora Comercial Mexicana, S.A.B. de C.V. (CCM), headquartered in Mexico City, is Mexico's third largest food and general merchandise retailer, with USD4.4 billion in revenues in 2010. As of December 31, 2010, CCM operated 232 stores under eight retail banners with a total selling area of 1.64 million square meters. CCM has a nationwide presence with about 70% of its selling floor concentrated in the Mexico City metropolitan area and the country's central region. The company is also present in Mexico's family-style convenience restaurant segment, with 70 "California" brand restaurants throughout the country, and four "Beer Factory" brand dining restaurants. Despite the bankruptcy, CCM remains family controlled, while approximately 36% of its shares are traded on the Mexican Stock Exchange.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics 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 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.

Mexico
Alonso Sanchez
Asst Vice President - Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

New York
Brian Oak
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's assigns a Baa1.mx rating to Controladora Comercial Mexicana
No Related Data.
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