OREANDA-NEWS. Fitch Ratings has downgraded the ratings of General Shopping Brasil S.A. (GSB) as well as those of its subsidiaries. See the full list of rating actions at the end of this release.

In addition, Fitch has assigned 'RR2' and 'RR5' Recovery Ratings to GSB's USD250 million perpetual notes and USD150 million subordinated perpetual notes, respectively.

The ratings have been placed on Rating Watch Negative.

The downgrades reflect GSB's deterioration in its financial leverage and capacity to service interest expense. The Negative Watch reflects the expectation that GSB's credit profile deterioration will continue during the second half of 2015 (2H15), putting pressure on its liquidity. The Negative Watch also incorporates the view that GSB entering into a debt restructuring process is likely to occur in the near future.

KEY RATING DRIVERS

High Leverage Driven by FX Exposure:

The company's high financial leverage is expected to further deteriorate during 2H15 driven by its foreign exchange (FX) exposure. GSB's last 12-month period ended on June 30, 2015 (LTM June 2015) with EBITDA of BRL179 million, and total debt of BRL1.9 billion. GSB had total net debt-to-EBITDA of 9.4x as of June 30, 2015. All of the company's cash flow- measured as EBITDA - is generated in local currency, Brazilian reais, while approximately 54% of its total debt is denominated in U.S. dollars. The Brazilian local currency depreciated approximately 75% against the U.S. dollar during June 2014 - September 2015. With no reduction in its total debt and considering FX trends, GBS's net leverage is forecast to reach around 11.0 x by the end of 3Q15.

Weakening Capacity to Cover Interest Expenses:

Fitch views GSB's capital structure as untenable, as its high leverage has resulted in the weakening of the company's capacity to service its debt (i.e. principal and interest expenses). GSB's interest expense is forecasted to continue to increase, following FX trends, while cash flow generation remains flat. Interest expenses were BRL189 million during LTM June 2015, while interest coverage (EBITDA/gross interest expenses ratio) was 1.0x. With no change in the company's debt structure, GBS's interest expense coverage is expected to be around 0.65x during the next 12 months ended June 2016. In this situation, the company will have to use its ready available cash or rely on financing from third parties and its access to credit. GSB had a cash position and short-term debt of BRL222 million and BRL141 million, respectively, as of June 30, 2015.

Debt Restructuring Scenario Likely:

GSB's recent actions and announcements indicate that a debt restructuring process is likely to occur in the near future. On Sept. 8, 2015, the company exercised its right to defer the payment of interest under its USD150 million 12% perpetual subordinated notes. The interest payment deferral does not constitute an event of default under the indenture, and points to GSB's choice to preserve liquidity in this stressful environment. In addition, GSB announced that it plans to engage in certain transactions targeting at reducing its consolidated U.S. dollar-denominated debt. These transactions may include launching a tender offer for up to a portion of its USD250 million 10.00% perpetual notes.

The company is in the process of securing appropriate financing through the issuance of debt and/or equity to fund the potential tender offer. If the tender offer is launched, Fitch would classify it as a distressed debt exchange (DDE) if both of the following conditions apply: the restructuring imposes a material reduction in terms compared with the original contractual terms; and the restructuring or exchange is conducted in order to avoid bankruptcy, similar insolvency or intervention proceedings or a traditional payment default.

Quality Assets and Subordination Incorporated in Debt Recovery Prospects:

The company' total debt consists primarily of BRL864.4 million in secured local-currency debt, with the rest being the senior perpetual notes (USD250 million) and the subordinated perpetual notes (USD150 million). As of June 30, 2015, GSB's total assets were valued at an estimated BRL2.7 billion (approximately USD871 million), with encumbered and unencumbered assets representing approximately 64% and 36%, respectively, of the total. The 'RR2' recovery rating for the USD250 million senior perpetual notes reflects above-average recovery prospects in the event of default, the unencumbered assets-to-unsecured debt - considering only this security class - is estimated at 1.0x. The 'RR5' recovery rating for the USD150 million subordinated perpetual notes reflects poor recovery prospects in the event of default. The subordinated perpetual notes are subordinate to all senior creditors.

KEY ASSUMPTIONS

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

--Total net leverage consistently above 11.0x by Dec. 31, 2015;
--Interest coverage (EBITDA/gross interest expenses) consistently below 0.75x during 2015;
--Negative free cash flow generation during 2015.

RATING SENSITIVITIES

The following factors may have a negative impact on GSB's ratings:

Future developments that may, individually or collectively, lead to a negative rating action include further deterioration of GSB's liquidity position, execution of a distressed debt exchange; and, if the company defaults on its scheduled amortization/interest payments and/or formally files for bankruptcy protection.

The following factors may have a positive impact on GSB's ratings:

Future developments that may, individually or collectively, lead to a positive rating action include material improvement in the company's liquidity and financial leverage through some combination of the following actions: equity injection, asset sales with limited impact on cash flow generation, and lower FX exposure.

LIQUIDITY

Company liquidity is under pressure as GSB's high leverage has resulted in declining interest coverage. This is expected to intensify during 2H15 considering the current trend in Brazilian reais against the U.S. dollar and GSB's high FX exposure. GBS has a cash position and short-term debt of BRL222 million and BRL141 million, respectively, and BRL970 million (USD312 million) in unencumbered assets as of June 30, 2015.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings, and placed them on a Negative Rating Watch

General Shopping Brasil S.A. (GSB):
--Foreign currency Issuer Default Rating (IDR) to 'CCC' from 'BB-';
--Local currency IDR to 'CCC' from 'BB-';
--National Scale rating to 'CCC(bra)' from 'A-(bra)'.

General Shopping Finance Limited (GSF):
--USD250 million perpetual notes to 'B-/RR2' from 'BB-'.

General Shopping Investment Limited (GSI):
--USD150 million subordinated perpetual notes to 'CCC-/RR5' from 'B'.