Fitch Ratings has placed the following ratings of Cencosud S.A. (Cencosud) on Rating Watch Negative:
--Long-Term Issuer Default Rating (IDR) 'BBB-', RWN;
--Local Currency IDR 'BBB-', RWN;
--USD750 million unsecured notes due in 2021 rating 'BBB-', RWN.
The Rating Watch negative follows Cencosud's announcement that it has agreed to buy Carrefour SA's Colombian unit for approximately USD2.5 billion. This acquisition will pressure the company's liquidity position and financial flexibility, as the transaction is being funded entirely with short-term debt.
The company is expected to raise equity to fund a portion of the acquisition. The equity raised will have to be substantial to avoid a downgrade. If the equity raised is not substantial then a downgrade could occur. The new equity will be in addition to the capital increase during the third quarter of 2012 of USD1.2 billion. The transfer of assets being acquired is expected to close before Dec. 31, 2012.
This capital increase is expected to take place alongside an international debt offering. The targeted outcome of these measures is to bolster Cencosud's capital structure and improve its debt repayment schedule. Fitch estimates Cencosud's pro forma total adjusted debt-to-EBITDAR ratio to increase to around 5.5x following completion of the acquisition. The company's consolidated total adjusted debt-to-EBITDAR ratio at the end of June 2012 was 4.8x. Should this ratio remain above 3.5x following the expected capital increase, a rating downgrade is likely to occur.
The company's liquidity position will be weak post-acquisition. Considering the USD2.5 billion of short-term funding, Cencosud's short-term pro forma debt is estimated to be around USD3 billion, representing approximately 45% of its total on-balance-debt post acquisition, with a low cash position.
The acquisition will increase Cencosud's regional presence in the Latin America retail industry by accessing the growing Colombia market, and broaden its geographic diversification in the region. The operations being acquired (Carrefour's Colombian unit) includes 72 hypermarkets, 16 convenience stores and four cash-and-carry stores.
Fitch views the acquisition as strategically positive over the medium term. The growth of the Colombian operations is expected to reduce Cencosud's exposure to Argentina, a country with high sovereign risk. The company's operations in Argentina currently account for approximately 28% of its total revenues.
With this acquisition Cencosud will not only become the second largest supermarket operator, with an estimated market share of around 14%, and a main player in home-improvement stores in Colombia, but it will also give Cencosud strategic access to an important land bank. This was one of the main barriers to expanding its operations in Colombia.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
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