OREANDA-NEWS. Fitch Ratings has affirmed the 'BB-' foreign currency and local currency Issuer Default Ratings (IDR), as well as the 'A(mex)' long-term National Scale rating of Grupo Elektra, S.A.B. de C.V. (Elektra). The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.

The rating actions reflect higher leverage in the retail segment (excluding banking subsidiaries), due to several reasons such as lower revenues and margins in the past few years when compared with a peak in 2012 and devaluation of the Mexican peso, that are countered by a stronger credit profile of Banco Azteca S.A. (BAZ; rated 'A+(mex)' and 'F1(mex)' by Fitch) and sound liquidity.

Elektra's ratings are supported by its operation's geographical diversification; its market position both in the retail and finance business, as one of the main Mexican department store chains, an operational and financial linkage with BAZ, as well as a sizable liquidity position. Elektra's ratings take into account high leverage, unhedged debt totalling USD550 million due 2018 balanced by cash flows from U.S. operations and money transfer fees collected in USD, and an improved financial flexibility from more concentrated funding five years ago. The ratings also consider the controlling ownership by the Salinas family.

KEY RATING DRIVERS
Retail Sales Recovering
Revenue decline in the retail division during 2013 seems to have been arrested. For the last 12 months (LTM) ended March 31, 2015, retail sales were MXN24 billion, a 20% increase versus the first quarter of 2014 (1Q14). Growth was driven by strong performance in motorcycle sales, as well as new revenues generated by Blockbuster Mexico. Fitch believes that the retail operation, by diversifying geographically across Latin America, somewhat mitigates revenue concentration (operations in Mexico, both retail and financial, generate about 75% of the Group's consolidated revenues).

BAZ Supports Elektra's Ratings
BAZ's ratings consider the bank's robust franchise in its main market, consumer loans, giving it a considerable competitive advantage, as well as its still high and stable interest margins, despite drops in 2014. Furthermore, they incorporate the bank's adequate ability to absorb losses, its solid funding structured through an ample, stable, diversified and low-cost base of core customer deposits. Its adequate capitalization ratios, which has benefited from the slow growth of its loan portfolio in 2014, also support the ratings.

Leverage Expected to Decline Gradually
The retail operation's leverage (excluding BAZ and other Latin American financial businesses, and including Advance America (AEA)) is expected to decline gradually as a consequence of improved results from both retail and AEA and expectation of slightly lower debt levels. Fitch estimates that total adjusted debt-to-EBITDAR and debt-to-EBITDA (March 31, 2015 on an LTM basis and excluding non-cash items) are about 4.8x and 3.5x, respectively, an increase from 4.3x and 3.1x a year before. Also, for March 31, 2015 LTM, adjusted net debt-to-EBITDAR is estimated to be around 3.6x.

As of March 2015, the retail business' total debt (excluding BAZ and other financial businesses) was MXN17.7 billion, down from MXN18.1 billion in the same period the previous year. Debt is composed of bank loans, local and international debt issuances and local structured issuances and is expected to be around MXN17 billion by year-end 2015. Furthermore, Fitch estimates off-balance-sheet debt related to operating leases at about MXN21.7 billion.

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

--Consolidated EBITDA margins in the low teens;
--Consolidated EBITDA above MXN9 billion;
--Dividend payments growing about the Mexican inflation rate.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to negative rating actions include sustained adjusted debt to EBITDAR above 5.0x due to operational trends or further MXN devaluation, sustained adjusted net debt to EBITDAR above 4.0x (including readily available cash equivalents, as per Fitch's calculations), a breach of covenants, as well as deterioration in Banco Azteca's creditworthiness.

Factors that may, individually or collectively, lead to positive rating actions include a sustained decrease in adjusted leverage and adjusted net leverage to levels of about 3.5x and 3.0x over time, respectively, due either to an increase in retail sales and EBITDA or through debt reduction. Other factors would be a strengthening of the bank's creditworthiness coupled with stabilization and recovery of the retail operations' revenue and cash flow dynamics.

LIQUIDITY
Elektra's liquidity position is sound. As of March 31, 2015, cash for the retail division was MXN5.6 billion. Fitch takes into account that Elektra's MXN13 billion marketable financial instruments portfolio could partially provide liquidity against short-term debt of MXN7.6 billion. In 2015, Elektra has paid annual dividends of MXN563 million and Fitch expects for this amount to increase broadly in line with inflation for following years.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Grupo Elektra, S.A.B. de C.V.
--Foreign and local currency Issuer Default Rating (IDR) at 'BB-';
--Long-term National Scale rating at 'A(mex)';
--Short-term National Scale rating at 'F2(mex)';
--USD550 million senior notes due 2018 at 'BB-';
--MXN7.6 billion long-term Certificados Bursatiles issuances (ELEKTRA13, ELEKTRA14 and ELEKTRA14-2) at 'A(mex)';
--Short-term portion of Certificados Bursatiles program for up to MXN10 billion at 'F2(mex)'.

The Rating Outlook is Stable.