OREANDA-NEWS. Fitch Ratings has upgraded Maestro Peru S.A.'s (Maestro) Local and Foreign Currency Issuer Default Ratings (IDR) and senior unsecured notes ratings to 'BBB' from 'B'. The Ratings have been removed from Rating Watch Positive.

The Rating Outlook is Stable.

Maestro's ratings upgrade reflects the strong operational and strategic ties between Maestro and its holding company S.A.C.I. Falabella (Falabella). Maestro was acquired by Falabella subsidiary, Sodimac Peru, in September, 2014. Falabella purchased 100% of Maestro's shares for approximately USD492 million. Maestro and Sodimac Peru are strategically important to one of Falabella's core retail businesses, home improvement retail. Collectively, Maestro and Sodimac Peru represent 14.2% of Falabella's home improvement retail store revenue and 6.5% of Falabella's total revenues as of LTM March 2015.

KEY RATING DRIVERS

Strong Rating Linkage to Parent

Falabella is actively involved in the management of Maestro and has complete control of Maestro's Board of Directors due to its 100% ownership stake. Following the acquisition, Maestro adopted all the same accounting policies and procedures of Falabella's operating subsidiaries. Although there are no legal guarantees on Maestro's debt obligations or cross-default provisions, tangible financial support is provided to Maestro through intercompany loans and liquidity facilities from Sodimac Peru S.A. and Falabella Peru S.A. As of March 2015, intercompany short-term loans to Maestro were USD55 million. Additionally, Falabella has recently announced a USD77 million equity injection in order to prepay 35% of the USD200 million senior unsecured notes later this year. Maestro is a key component of Falabella's strategy to grow in the home improvement retail division in Peru.

Strong Equity Holder:

Falabella (rated 'BBB+'/Stable Outlook by Fitch) is a regional retailer with operations in Chile, Peru Colombia, Argentina, Brazil, and Uruguay. Falabella has 439 stores, including department stores, home improvement stores, and supermarkets, as well as 38 shopping malls. The company also has a large and solid financial services business that has over 4.6 million active accounts and a loan portfolio of USD5.9 billion. As of LTM March 2015, the group had revenues of USD12.4 Billion. Sodimac Peru S.A. started operations in 2004 to provide expertise advice on all home improvement related projects, including supplying building products and financing. It currently operates 27 stores. In 2014, Sodimac Peru's sales were USD569 million.

Sustainable Market Position:

By acquiring Maestro, Falabella strengthened its leadership in home improvement retail business in Peru. Through Maestro, Falabella acquired its main competitor and doubled its market share in the modern retail channel in Peru, which represents 23% of the total home improvement market, diversified into a new brand, increased home improvement stores from 27 to 57 in strategic locations nationwide and acquired an important land bank for future developments. Maestro maintains an established and recognized brand and it is well positioned as a low-price specialist focused on both do-it-yourself (DIY) individuals as well as professional customers, while Sodimac targets more on family oriented customers. Maestro's sustainable market position is supported by the positive medium-term fundamentals of Peru's home improvement industry reflected in increasing purchasing power of households and the industry's low penetration. Although the economy faced a slowdown in the last year, it is expected to recover in the short term.

FCF trending to positive:

During LTM March 2015, the company's FCF was negative at USD12.2 million considering Funds From Operations (FFO) of USD32 million minus USD42.6 million from increases in working capital and USD1.7 million in Capex. Negative Working Capital is the result of account payables reductions in order to align Maestro to the Falabella Group's practices and get more favorable purchasing conditions from suppliers. Capex of LTM March 2015 was significant lower at USD1.7 million compare to 2014 level (USD70.9 million). For YE2015, Fitch expects limited capex for maintenance and FCF trending to positive; the group more than doubled its number of stores in Peru's home improvement segment will reduce the number of new store openings in 2015 as the company consolidates its market position.

Weak Operating Results

Maestro's revenues of USD505 million during the LTM March 2015 decreased compared to 2014 (USD524 million) and 2013 (USD543 million) after showing a high revenue growth in the prior years. Same store sales (SSS) decreased by 4.9% during 2014 and the company reached average sales levels of USD3,177 per square meter, which were lower than the USD3,294 and USD3,826 per square meter recorded during 2014 and 2013, respectively. Lower sales per square meter were due to the adverse business environment affecting the Peruvian's home improvement retail sector as well as the opening of new stores - 7 new stores opened during 2013 adding 41,936 m2 (25.4% of total store area); new locations take between 3 to 4 years to mature and reach expected more mature store square meter sales levels.

Fitch expects revenues to recover in 2016 along with the economic cycle. Following the acquisition, Maestro's EBITDA significantly reduced in 4Q14 mainly due to one-time adjustments. Fitch projects EBITDA to be around USD38 million in 2015 and USD45 million in 2016 due to recovery on revenues and improvement on margins as a result of the focus on higher profitable products and synergies coming from the operational integration with Sodimac Peru.

High Leverage, No Covenant Issue

As of LTM March 2015, leverage was negatively affected by the prior year adjustments which reduced EBITDA while amount of debt slightly increased from YE 2013. The company's total adjusted debt was approximately USD307 million at the end of March 2015. This debt includes USD217 million in on-balance-sheet debt, mostly comprised of the USD200 million unsecured notes issued on September 2012; the notes are 100% hedged against currency risk. Total off-balance-sheet debt of USD90 million is calculated adjusting by 7x the company's rental payments of USD13 million during LTM March 2015.

Considering EBITDA recovery and the prepayment of USD70 million debt, Gross Adjusted Leverage is projected to be around 5.0x by YE 2015. The company's USD200 million bond indenture considers a limitation on additional indebtedness of a consolidated debt to EBITDA ratio no greater than 4.5x prior to year two after issuance, 4x in year two and prior to year three; and 3.5x thereafter. The indenture also includes carveouts that allow for additional new debt - up to USD40 million - despite being above the maximum financial leverage covenant. As of March 2015, the company's financial leverage ratio was above the covenant maximum limit but the additional new debt incurred was USD10 million below the maximum allowed for additional indebtedness (USD40 million).

KEY ASSUMPTIONS

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

--Revenues decrease at 4.4% in 2015 and recover since 2016 at an annual growth rate of 5%.
--EBITDA margin improvement from 8% in 2015 to 9% in 2016 and 10% in 2017 onwards.
--Capex for maintenance: Around USD4-5 million per year. Number of stores maintains at current level (30 stores).
--No dividend payments.
--Positive FCF.
--Equity injection for USD77 million to prepay 35% of USD200 million Senior Unsecured Notes.
--Operational and financial support from Falabella.

RATING SENSITIVITIES

Negative: Maestro's ratings benefit from its ownership by Falabella because of its strong operational and strategic ties, based on Fitch's Parent and Subsidiary linkage criteria. Should the current level of operational and strategic ties be reduced, then a rating action based on Maestro's much weaker standalone credit profile could follow. If Maestro encountered operational and financial difficulty, Fitch would expect Falabella to take steps to demonstrate support to its subsidiary. Should such support not be forthcoming a rating downgrade could take place. Maestro's ratings would also be downgraded following a rating downgrade of Falabella.

Positive: While not expected at this time, an upgrade and/or Positive Outlook would depend on positive actions in Falabella's rating and/or improvements on Maestro's operational performance combined with a balance between capex, liquidity and capital structure.

LIQUIDITY

The company's liquidity is benefited by the potential support from Falabella. Due to a lower capex and recovery on margins as well as the equity injection for USD77 million, Fitch expects Maestro to improve liquidity and reduce leverage. As of LTM March 2015, the amortization schedule is manageable as most of its debt, the USD200 million bond, due on September 2019 from which 35% would be prepaid at September 2015. Additionally, Maestro, through its parent, currently has access to bank financing although it has limitations on additional indebtedness.

FULL LIST OF RATING ACTIONS

Fitch has upgraded the ratings for Maestro Peru S.A. as follows:

--Local & Foreign IDR to 'BBB' from 'B';
--Senior unsecured debt to 'BBB' from 'B/RR4'.