Approximately USD 1.6 billion in debt instruments affected
Mexico, March 09, 2011 -- Moody's Investors Service ("Moody's") assigned a Ba3 corporate family
rating to Controladora Comercial Mexicana, S.A.B.
de C.V. ("CCM"). At the same time,
Moody's assigned Ba3 senior secured ratings to MXN16.4 billion
(USD1.3 billion) in various domestic currency bonds and loans due
from 2012 to 2018 and a Ba3 senior secured foreign currency rating to
USD224 million in global bonds due in 2018. The rating outlook
- First Lien Sr. Secured Restructured MXN5,255 million
loans (Tranche 1), Assigned Ba3
- First Lien Sr. Secured Restructured MXN3,408 million
loans (Tranche 2), Assigned Ba3
- MXN4,151 million under Asset Linked Facility (ALF) Tranche
A1, Assigned Ba3
- MXN1,616 million under ALF Tranche A2, Assigned Ba3
- Sr. Secured Restructured MXN1,951 million global
bonds due in 2018, Assigned Ba3
- Sr. Secured Restructured USD224 million global bonds due
in 2018, Assigned Ba3
"The Ba3 ratings balance the benefits of a fairly defensive business
profile typical for a food retailer and the 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
Nymia Almeida, Vice President and Senior Analyst at Moody's.
During the debt restructuring process in late 2008 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 for
the Ba3 rating category, with leverage at 5.6x and FCF/Net
Debt at 2.8%. However, going forward,
we expect that metrics will gradually improve towards levels more in line
with its rating, as the company uses excess cash from operations
and potencial 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.
Currently, all of CCM's debt is secured. Whereas around
MXN18.4 billion (USD1.5 billion -reduced from original
USD1.6 as the company prepayed a portion of Tranch 1 and 4 of the
restrucred loans in the end of 2010-) of restructured debt is at
CCM holding company level, the company also has around MXN1.5
billion (USD118.0 million) outstanding debt in secured certificados
bursátiles due in 2016 (unrated), issued by Tiendas Comercial
Mexicana (TCM), the main operating subsidiary of CCM. The
company's committed credit lines are also at TCM level. We
note that, even when this creates potential subordination of payments,
maximum debt at TCM, including current committed credit facilities,
will reach only about 11% of total debt. This low portion
of debt at the operating subsidiary along with contractual restrictions
under the restructured debt agreements mitigate the subordination risk.
In addition, all of the rated debt is at the same level given Moody's
expectations that recoveries in a stress scenario will likely be similar
considering the various collateral and structural considerations.
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 for the current Ba3 level 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
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.
This is the first time we rated CCM, after ratings were withdrawn
in late 2008, prompted by the credit default.
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
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
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
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in assigning a credit rating is of sufficient quality and from sources
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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
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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.
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used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Nymia C. Almeida
Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's de Mexico S.A. de C.V
Moody's assigns Ba3 rating to Comercial Mexicana's restructured debt
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