OREANDA-NEWS. Fitch Ratings has affirmed Grupo Famsa S.A.B. de C.V.'s (Famsa) local and foreign currency long-term Issuer Default Rating (IDR) at 'B+' as well as the long-term National Scale Rating at 'BBB(mex)'. The Rating Outlook is Stable. Fitch has also assigned a 'BBB(mex)' rating to Famsa's MXN1 billion new local issuance. A full list of rating actions follows at the end of this press release.

FAMSA's ratings reflect its market position in the Mexican retail sector, geographic and product diversification, broadly stable operating cash flow generation by the retail operation, as well as an expectation of a gradual improvement in leverage. The ratings are constrained by historically low growth in retail sales, still high levels of non-performing loans (NPLs) and a linkage with its banking subsidiary, Banco Ahorro Famsa ([Banco Famsa; or BAF] rated 'BBB(mex)'/Stable Outlook). The 'RR4' rating reflects average recovery prospects in case of default between 30% and 50% of principal.

KEY RATING DRIVERS

Good Performance in Mexican Retail Sales:
Following the consumption recovery in the country for 2015, Famsa presented a consolidated revenues increase of 11.8% compared to 2014. EBITDA margin also increased to 10.7% from 9.7% in 2014, partly due to a better mix in product sales and Banco Famsa's provision decreases related to NPLs. Famsa's main challenge is to retain and increase market share in a market where larger retail chains such as Coppel and Elektra, also target the low-income segment of the population.

Banco Famsa Undergoing Operational Consolidation:
FAMSA's financial division, Banco Famsa, has good brand equity and competitive position in consumer finance, mainly in northeastern Mexico. Its financial performance is constrained by its high credit costs which limited the bank's ability to be more profitable, and still high loan-impairment charges. However, BAF is addressing it and still shows a reasonable capital adequacy. During 2014 and 2015, Famsa made a total of MXN400 million capital increase in BAF.

BAF continues to operate with a diversified and growing base of customer deposits. BAF also shows organic growth of its loan portfolio, although customers' sensitivity to a weak economic environment continues to be a limiting factor.

Improvement in NPL, Still Above the Peers:
As of Dec. 31, 2015, Famsa's consolidated portfolio (excluding collection rights) had an average of 15.6% of overdue accounts (more than one day overdue) and 12.9% of NPLs (past due accounts for 90 days or more). These compare positively to 17.4% and 14.5% presented in December 2014, respectively, due to the company's collection efforts and changes in credit granting policies. However, these NPL indicators are still high compared to the regional peers focused on the same market segment which have NPL indicators below 10%. As of December 2015, the company has consolidated reserves equivalent to 46% of those NPLs.

USA Operations EBITDA-Positive:
The last two years have been positive for Famsa's USA operations. Fiscal year end (FYE) 2015 EBITDA for the U.S. operations is MXN93 million, an increase compared to MXN88 million in 2014. Most of that increase is related to the peso devaluation and to a lesser extend to increases in personal loans and Famsa to Famsa revenues. Same store sales for the USA operations kept growing for 2015 and the company expects to continue this trend in the near future.

Leverage Expected to Be Broadly Constant:
Fitch expects debt-to-EBITDA (excluding bank deposits) to remain constant in the short- to medium-term. Debt-to-EBITDA and net debt-to-EBITDA for 2015 (excluding bank deposits) are 5.1x and 3.9x, respectively.

Consolidated leverage and net leverage (including bank deposits) are 15.5x and 14.2x, respectively. Consolidated leverage has increased mainly due to the Mexican peso's devaluation against the U.S. dollar, working capital financing and increasing banking deposits. Famsa has not declared dividends for the last few years and has a limited share repurchase program for up to MXN300 million.

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

--Consolidated revenues grow in average 5% annually during 2016-2019;
--EBITDA margin of 10.6% during 2016-2019;
--EBITDA from the U.S. division continues to be positive;
--Average funds from operations (FFO) of MXN2.9 billion per year for 2016-2019;
--Consolidated debt (excluding bank deposits) to be around MXN7 billion in 2016-2019.
--Average capex of MXN325 million during 2016-2019.
--No Dividends payment for 2016-2019.

RATING SENSITIVITIES
Future developments that may individually or collectively lead to a negative rating action include: deterioration in BAF's creditworthiness beyond FAMSA's ability to lend support, consolidated gross leverage (excluding bank deposits) consistently above 5.5x, lower EBITDA generation by FAMSA USA as well as by significant deterioration in the quality of the loan portfolio.

Future developments that may individually or collectively lead to a positive rating action include: sustained improvement in profitability margins and/or organic growth in sales that consistently outperforms the industry, a strengthening of Banco Famsa's credit quality as well as a sustained gross leverage (excluding deposits) below 4.0x.

LIQUIDITY

Liquidity Should Be Adequate. For year-end 2015, FAMSA's debt amounted to MXN9.1 billion and bank deposits totaled MXN18.4 billion. FAMSA's debt is comprised of senior notes, national short- and long-term issuances and bank loans. Short-term debt as of Dec. 31, 2015 was MXN4.2 billion, with non-restricted cash holdings of about MXN2.2 billion, so some refinancing risk could persist. However, the company's short-term receivables portfolio of MXN26.6 billion should also support the company's liquidity.

As of Dec. 31, 2015, short-term debt (excluding bank deposits) is 79% denominated in pesos. On a pro forma basis, after Famsa's payment of the USD33 million commercial paper in January 2016, short-term debt would be 92.7% denominated in pesos. Short-term debt for Famsa is mostly made up of short-term Cebures programs and bank loans and is primarily used to finance working capital.

Famsa is exposed to currency variations. As of Dec. 31, 2015, Famsa's retail division debt was 57% dollar-denominated and it didn't have hedging instruments. After the payment of the dollar denominated commercial paper in January 2016, that percentage decreased to 52% of total debt. Nevertheless, currency exposure is partially mitigated by cash flows from the U.S. operations.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following rating:

--MXN1 billion Certificados Bursatiles new issuance due 2017 at 'BBB(mex)'.

Fitch has affirmed the following ratings:

--Foreign currency long-term IDR at 'B+';
--Local currency long-term IDR at 'B+';
--Long-term national scale rating at 'BBB(mex)';
--Short-term national scale rating at 'F3(mex)';
--USD250 million senior unsecured notes due in 2020 at 'B+/RR4';
--MXN1 billion Certificados Bursatiles issuance due 2016 at 'BBB(mex)';
--MXN1 billion short-term Certificados Bursatiles program at 'F3(mex)'.

The Rating Outlook is Stable.