OREANDA-NEWS. Fitch Ratings has placed the ratings for Hypermarcas S.A. (Hypermarcas) on Rating Watch Positive. This action follows the company's announcement that it has signed an agreement to sell its beauty products business to Coty Inc. (Coty) for BRL3.8 billion. Fitch currently rates Hypermarcas' foreign and local currency Issuer Default Rating (IDR) 'BB+' and national scale rating 'AA(bra)'. A full list of ratings follows at the end of this release.

The Positive Watch reflects Fitch's view that Hypermarcas' transaction with Coty will improve Hypermarcas' capital structure. Fitch expects the company to uses the proceeds to strengthen its balance sheet by reducing higher cost debt, while also maintaining a strong cash position, which could result in a credit profile more consistent with an investment grade rating. On the successful closing of the transaction, Hypermarcas would show a positive net cash position (net of total debt) of BRL322 million as of Sept. 30 2015, on a proforma basis. Fitch estimates that if 50% of the proceeds are used to pay down debt, the Hypermarcas' total leverage ratio would decline to around 3.5x in 2015 and to slightly below 3.0x in 2016. This would be a significant improvement from the 4.6x average during the 2012 to 2014 period. Per Fitch estimates, Hypermarcas's Beauty segment represents around 19% of the company's total EBITDA of around BRL1.1 billion during the last 12 months period end in Sept. 30 2015.

Hypermarcas's business profile should remain strong with a greater focus being placed on the pharma segment. As of Sept. 30 2015, Fitch estimates the pharma segment to represent roughly 78% of the Hypermarcas' EBITDA generation. This business has been the most profitable and stable segment within Hypermarcas' product portfolio. The resilience of this business is evidenced by the solid growth of its operations during 2015, in high single digits despite the economic recession in Brazil.

KEY RATING DRIVERS

Hypermarcas' ratings reflect its leading position in the competitive Brazilian pharmaceutical market, the strength and diversification of its brands, and the resilience of its product portfolio. The company's low ticket and less discretionary consumer products supports the defensive nature of its portfolio and is a key factor supporting its business fundamentals in a sluggish macroeconomic scenario. The ratings also incorporate Hypermarcas' moderate leverage and robust liquidity position.

KEY ASSUMPTIONS

--Proforma revenue growth in the single digit range in 2015, and remaining above 6% in the next three years,
--EBITDA margin decline to around 22% due to inflation, weaker product portfolio and the impact of the strong U.S. dollar on costs;
--Improvements in working capital needs, declining to around 5% of net revenues;
--BRL180 million of maintenance capex going forward;
--Dividends of 25% Net Income only from 2016 on;

RATING SENSITIVITIES

Rating Watch Positive will be resolved upon the successful closing of the transaction and the potential upgrades in Hypermarcas' ratings will largely hinge on the company to reduce debt and interest expense.

If the deal does not close, Fitch expects to affirm the company's current ratings, and re-evaluate a potential positive outlook in order to assess the company's ability to reduce leverage with its internal cash flow from operations or the sale of disposable products business. On Sep, 14 2015 Fitch had affirmed Hypermarcas' ratings and changed the outlook to positive from stable. Rating upside is somewhat constrained by Brazil's country ceiling which is 'BBB'. The sovereign rating is
'BBB-'; Outlook Negative.

LIQUIDITY

Hypermarcas has a track record of keeping strong cash balances. As of Sept., 30 2015, the company had BRL5.1 billion of debt, of which BRL1.7 billion is due in the short term, while cash and marketable securities was solid at BRL1.6 billion. This high amount of debt coming due in the short term includes the first series of the private debentures (BRL831 million), which was paid during October with a mix of cash and local capital market debt. The company counts on additional liquidity coming from stand-by credit facilities that have undrawn amounts of BRL620 million.

Fitch expects Hypermarcas to execute the call option on its 2021 bond during April 2016. The company has a USD323 million outstanding balance on its USD750 million bond. The proceeds shall come from local issuances or from the asset sale.

FULL LIST OF RATING ACTIONS

Fitch has placed the following ratings on Rating Watch Positive:

--Long-term foreign currency Issuer Default Rating (IDR) 'BB+';
--Long-term local currency IDR 'BB+';
--Senior unsecured notes due in 2021 'BB+';
--Long-term National Scale rating 'AA(bra)';
--Third debentures issuance 'AA(bra)'.