OREANDA-NEWS. Fitch Ratings has affirmed Cencosud S.A.'s (Cencosud) ratings as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB-';
--Local Currency IDR at 'BBB-';
--USD750 million unsecured notes due in 2021 at 'BBB-';
--USD1.2 billion unsecured notes due in 2023 at 'BBB-';
--USD650 million unsecured notes due in 2025 at 'BBB-';
--USD350 million unsecured notes due in 2045 at 'BBB-'.

The Rating Outlook for the corporate ratings has been revised to Stable from Negative.

The revision of the Rating Outlook reflects Fitch's view that Cencosud will have the capacity to continue reducing its total adjusted gross leverage - including retail, shopping malls and banking operations - reaching levels below 4x on a sustained basis over the next 12 to 24 months. Gross financial leverage - excluding liabilities related to the banking and shopping malls businesses - is expected to reach levels around 3x over the period. Also considered in the Stable Outlook is the expectation that the company will maintain a balance between cash flow from operations versus capital expenditures and paid dividends. Cencosud is expected to adjust its capital expenditures and paid dividends if this is required to maintain neutral to positive FCF over the 2015 - 2016 period.

Cencosud's investment grade ratings reflect its solid regional market position, business and geographic diversification, critical size in the food segment relative to its main competitors, and important presence in the non-food retail segment. The high level of the company's unencumbered assets related to its real estate portfolio in the shopping center segment is also viewed positively. Factors constraining the ratings include the company's high leverage and its exposure to Argentina's high sovereign risk. Cencosud has a dominant position in the retail business in Chile, a strong market position in Peru, Argentina, and northeast Brazil, and a growing presence in Colombia. The company's business model is predictable in terms of cash flow generation, which reflects the predominance of the less-cyclical supermarket retail format and a very stable cash-flow-generation shopping mall business.

KEY RANTING DRIVERS

Recent JV Approval Positive Credit Factor

Recent approval - on April 13, 2015 - by Chilean regulator authority of the joint venture (JV) transaction with Banco of Nova Scotia (Scotiabank) is viewed as a credit positive. Upon fully execution of the transaction, Cencosud would receive a cash payment of approximately USD1.1 billion that would be entirely used to reduce its debt. Of this payment, approximately USD280 million would be from the sale of a 51% share of Cencosud Administradora de Tarjetas S.A. (CAT) to Scotiabank, while the additional net process would be related to the funding of the credit card portfolio by Scotiabank. Currently, the funding of the portfolio is being provided by Cencosud. The signed contract included all the terms needed for the materialization of the partnership. The transaction is expected to be fully executed by early May. Cencosud will have an option to buy back Scotiabank's 51% stake after 15 years.

In addition to the business leverage reduction, the JV transaction completion also brings positives in terms of working capital needs and business management. After the transaction is completed, the company will have lower working capital requirements, as it will no longer be funding the growth of the Chilean financial retail operations. Furthermore, with the joint venture handling the administration of credit card operations, Cencosud management will have more room to focus on improving margins in the supermarket segment, its core business.

Business Deleverage Expected to Continue

Cencosud's cash generation, as measured by EBITDAR, was USD1.6 billion during the latest-twelve-months (LTM) ended Dec. 31, 2014. The company had USD7.4 billion in total adjusted debt as of Dec. 31, 2014. This debt consisted of USD5.3 billion of on-balance-sheet debt and an estimated USD2.1 billion of off-balance-sheet debt associated with lease obligations (rentals of USD328 million during LTM December 2014). The company's adjusted gross leverage, as measured by the ratio of total adjusted debt to EBITDAR, was 4.6x as of Dec. 31, 2014. 2014 Credit metrics calculation considers end of period and average exchange rates of 627.76 and 574.68 Chilean Pesos per US dollar for 2014.

Assuming the company uses 100% of the transaction proceeds - estimated at USD1.1 billion - Cencosud's pro forma adjusted gross leverage is estimated at 4.3x versus 4.6x before JV transaction. The ratings incorporate the expectation that the company will continue reducing its gross adjusted leverage to maintain a consolidated gross adjusted leverage below 4x on a sustained basis.

After the transaction the supermarket and shopping mall (real estate operation) segments become the company's main cash flow generators, representing approximately 65% and 25% of the company's total adjusted EBITDA. To have an estimation of the company's financial leverage related to the pure retail operations, a second pro forma calculation, excluding real estate operations and banking operations, results in total adjusted gross leverage at 3.8x. The real estate operations are characterized by high leverage but benefit from high and stable margins, as the lease structure, including fixed-rent payments, support very predictable revenue levels.

Adequate Liquidity

Positively incorporated is the company's recent successful execution of its liability management strategy, which occurred in early February 2015 with its USD1 billion unsecured notes issuance. This allowed Cencosud to refinance an important portion of its short-term debt. On a pro forma basis after unsecured notes issuance, the company faces a manageable debt scheduled with debt payments of USD286 and USD143 million during 2015 and 2016, respectively. Further the recently approved JV credit card transaction with Scotiabank is expected to add financial flexibility.

Operational Margin Trend

The company operational challenge is to improve revenue and margin trend despite difficult regional business environment. From an operational perspective, Cencosud's main task during the next 24 months will be to accelerate business growth and improve margins, despite facing weak business conditions. Current business scenarios in most of Cencosud's markets support expectations of moderate revenue growth during 2015, most likely in the single digits. The company's capacity to improve and stabilize its Brazilian and Colombian operations, which are its most problematic markets, will be essential for margin growth. Colombian operations are expected to delivery operational improvement in 2015, while limited improvement is anticipated in Brazilian operations for 2015.

Neutral to Positive Free Cash Flow

The company ended the LTM Dec. 31, 2014 period with slightly negative free cash flow (FCF). Cencosud's cash flow from operations (CFFO), capital expenditures (Capex) and paid dividends reached levels of USD350 million, USD396 million, and USD97 million, respectively, during 2014. The CFFO calculation includes cash paid interests of approximately USD222 million during the period. The company's FCF is expected to be neutral to positive during the 2015 - 2016 period.

Key factors for continued business deleverage during 2015 - 2016 period include Cencosud's management of its capex levels, working capital requirements, and paid dividends. Cencosud is expected to manage its capital expenditures at levels necessary to generate adequate levels of FCF. The recently approved JV transaction and recent actions taken on supermarket operations, primarily in Brazil and Colombia, are oriented toward reducing the company's working capital requirements. The company's paid dividends are expected to remain at similar levels to those observed during the last years.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Continued business deleverage during 2015 - 2016 period;
--Gross adjusted leverage - including retail, shopping malls and banking operations - below 4x on a sustained basis;
--Gross adjusted leverage - excluding retail, shopping malls and banking operations - below 3.5x on a sustained basis;
--Neutral to positive FCF in 2015;
--Good liquidity reflected in well-spread debt payment schedule.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:
--Sustained negative FCF;
--Weakening liquidity
--Gross adjusted leverage -including retail, shopping malls and banking operations - consistently above 4x;
--EBIT margin consistently below 4.5%;

Conversely, Fitch may take a positive rating action if a combination of the following factors takes place:
--Adjusted gross leverage -including retail, shopping malls and banking operations - sustained below 3x;
--Consistently positive FCF generation, reflected in FCF margin around 3% to 5%;
--EBIT margin consistently above 7%.