OREANDA-NEWS. Fitch Ratings has downgraded General Shopping Brasil S. A.'s (GSB) Issuer Default Ratings (IDRs) to 'C' from 'CC', and its USD250 million perpetual notes to 'C/RR4' from 'CCC/RR2'. Fitch has also affirmed GSB's USD150 million subordinated perpetual notes at 'C/RR5'. See the full list of rating actions at the end of this release.

The rating downgrade follows GSB's proposed debt exchange offering of its USD150 million subordinated perpetual notes announced on July 5, 2016. According to Fitch's rating distressed debt exchange criteria, the proposed offering imposes a material reduction in the original terms and conditions of the subordinated perpetual notes to creditors. The completion of the exchange offering would result in the IDRs being downgraded to Restricted Default ('RD'). Shortly after the distressed debt exchange is completed, the IDRs would be re-rated, typically, somewhere still in the highly speculative grade rating category.

KEY RATING DRIVERS

Proposed Debt Exchange:

GSB has announced that its subsidiary, General Shopping Investments Limited (the issuer), has commenced a private exchange offer in respect of any and all of its outstanding USD150 million principal amount of 12% perpetual subordinated notes (the existing notes). The issuer is offering to exchange any and all of their existing notes for (i) USD30 million newly issued U. S. dollar-denominated 10%/12% Senior Secured PIK Toggle Notes due 2026 (the new notes) to be issued by the issuer and unconditionally and irrevocably guaranteed by GSB and (ii) global depositary shares, each global depositary share representing 55 common shares of GSB, valued at approximately USD30 million in total at current market values.

The new notes will also be secured by a second mortgage ('hipoteca de segundo grau') on 50.1% of GBS' interest in Parque Shopping Maia; collateral coverage is estimated at about 2.0 to 1.0. The new notes will be senior to the GSB' USD250 million of existing perpetual notes, which are unsecured and would become subordinated obligations to the new notes as well as all other secured debt obligations. The debt exchange offer will expire on Aug. 1, 2016.

High Leverage, Weakening Liquidity:

GSB's capital structure is viewed by Fitch as unsustainable due to excessive financial leverage. GSB's last 12-month period ended March 31, 2016 (LTM March 2016) saw EBITDA of BRL178 million and total debt of BRL2 billion, with net total debt-to-EBITDA of 9.4x. All of the company's cash flow, measured as EBITDA, is generated in the local currency, Brazilian reais, while approximately 60% of its total debt is U. S. dollar-denominated.

GSB's FCF is expected to remain negative due to excessive cash interest payments during 2016. The company's high leverage and interest rates on its debt has led to high cash interest payments and declining interest coverage. GSB has a cash position and short-term debt of BRL47 million and BRL118 million, respectively, and approximately BRL466 million (USD130 million) in unencumbered assets as of March 31, 2016. On Sept. 8, 2015, the company exercised its right to defer the payment of interest under its USD150 million 10% perpetual subordinated notes. The interest payment deferral does not constitute an event of default under the indenture.

Quality Assets and Subordination Incorporated in Debt Recovery:

As of LTM March 2016, GSB's total assets were valued at an estimated BRL2.9 billion (approximately USD803 million using the FX rate of 3.59x), with encumbered and unencumbered assets representing approximately 84% and 16%, respectively, of the total assets value. The Recovery Rating (RR) of 'RR4' for the USD250 million perpetual notes reflects the average recovery prospects - in the 31% to 50% range - in an event of default.

Fitch has revised its initial expectations on the recovery prospects for the USD250 million perpetual notes from 'RR2' to 'RR4'considering GSB's current level of unencumbered assets and the recent terms offered in the $150 million proposed distressed debt exchange offering. The 'RR5' for the USD150 million subordinated perpetual notes reflects below average recovery prospects of approximately 11-30%; excluding any consideration for equity value.

KEY ASSUMPTIONS

The exchange offer launched on July 5, 2016, constitutes a distressed debt exchange under Fitch's criteria, because investors face a reduction in terms and conditions, and the restructuring is being conducted in order to avoid a traditional payment default. Fitch considers alternative options to be limited.

RATING SENSITIVITIES

The completion of the proposed exchange offer will lead to a downgrade of the Long-Term IDRs to 'RD'. A positive rating action may follow the implementation of an alternative capital structure that arises out of the restructuring process.

LIQUIDITY

Fitch views GSB's liquidity as unsustainable due to its high financial leverage. The company's total cash flow from operations for 2016 is estimated to be negative at around BRL125 million. Without a material change in the company's capital structure, GSB's limited capacity to cover interest expenses and taxes with its operational cash flow is expected to result in continued deterioration of its liquidity position during 2016.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating actions GSB's ratings:

--Long-Term Foreign Currency Issuer Default Rating (IDR) downgraded to 'C' from 'CC';

--Long-Term Local currency IDR downgraded to 'C' from 'CC';

--National Scale rating downgraded to 'C(bra)' from 'CC(bra)'.

General Shopping Finance Limited (GSF):

--USD250 million perpetual notes downgraded to 'C/RR4' from 'CCC/RR2'.

General Shopping Investment Limited (GSI):

--USD150 million subordinated perpetual notes affirmed at 'C/RR5'.