Fitch Rates Soriana 'BBB'; Outlook Stable

Fitch Ratings has assigned the following first-time ratings to Organizacion Soriana, S.A.B. de C.V. (Soriana):

--Long-term Foreign Currency Issuer Default Rating (IDR) 'BBB':

--Long-term Local Currency IDR 'BBB'.

The Rating Outlook is Stable.

Soriana's ratings reflect its important market position as the second largest supermarket chain in Mexico, its broad customer base supported by a number of store formats and its sound customer loyalty program and service strategy. The ratings consider the expected leverage increase once the acquisition of Controladora Comercial Mexicana, S.A.B. de C.V.'s (CCM) 143 stores is completed. On a pro forma basis, Fitch estimates Soriana's Total Adjusted Debt to EBITDAR ratio will increase to close to 4.0x, considering the last 12 months (LTM) ended Sept. 30, 2015.

The Stable Outlook incorporates Fitch's expectation that the company's upcoming free cash flow (FCF) will be directed mainly to reduce debt after CCM acquisition. Fitch anticipates that funds from eventual asset sales or other sources will be used to strengthen Soriana's capital structure. Fitch estimates Soriana will present an adjusted leverage ratio of 3.5x by the end of 2016, and it will improve as consolidated financial results strengthen.

KEY RATING DRIVERS

Acquisition Strengthens Market Position:

Fitch believes CCM's assets acquisition will complement Soriana's store formats and will enhance the company's geographical coverage, mainly in Mexico City and its Metropolitan Area. Fitch estimates synergies for about MXN1 billion from the first year of integration. With this transaction, Soriana expects to increase sales floor by 28% and total revenues by 30%. Soriana also expects to increase EBITDA by MXN3 billion per year.

The total acquisition amount is MXN35.6 billion, and it will be funded mainly by debt. The transaction includes 143 stores of which 12 are planned to be divested in order to comply with the anti-trust authority's conditions. The acquisition is comprised by several real estate assets (98 owned-stores and 33 lease contracts), inventory, equipment, three distribution centers, logistics and IT platforms, trademark rights, etc.

Operating Performance Key to Improving Credit Profile:

Soriana's ability to maintain the acquired stores' business position and profitability after the expiration of the 2.5-years trademark rights agreement is critical for the company's ratings. In Fitch's opinion, operating integration will allow Soriana to improve profitability and cash generation. According to Fitch's projections, consolidated EBITDA margin before synergies could reach 7.4% in 2016. This margin compares positive to 6.6% and 6.4% showed by the company in the LTM ended Sept. 30, 2015 and December 2014, respectively. Fitch also expects FCF generation to be robust to achieve the company's deleverage plan.

Sound Business Position:

Soriana's ratings reflect its important market position as the second largest supermarket chain in Mexico, its broad customer base supported by a number of store formats and complementary service offering. As of Sept. 30, 2015, Soriana had 678 stores with a total area of nearly 3.3 million square feet. After the acquisition, the total number of stores will be above 800.

Expected Debt Reduction:

Historically, Soriana has presented low leverage ratios and has taken debt to fund only acquisitions as part of its strategic growth plan. Fitch expects the company to maintain its conservative leverage policy in the medium term. Fitch calculates an adjusted debt to EBITDA of 3.0x for 2017 and 2.4x for 2018.

As part of the financing plan to acquire CCM's units, Soriana communicated its intention to fund the transaction with a combination of financial debt, hybrid debt, capital increase, non-strategic asset sales and operating cash generation in order to tighten up its financial position. However, Fitch's projections only consider the company's operating cash flows and a minimal amount of asset sales.

KEY ASSUMPTIONS

Fitch's key assumptions considered in the base rating case include:

--Consolidated revenues above MXN144 billion in 2016-2018;

--EBITDA margin of 7.4% for 2016 and expected to improve to 8% with synergies, profitability margins remain after trademark rights agreement;

--Capex between 1.5-2% of revenues in 2016-2018;

--Temporary suspension of dividends;

--MXN35.6 billion of new debt to finance CCM's acquisition in 2016;

--Annual FCF generation above MXN4.5 billion in 2016-2018 directed to reduce debt.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to negative rating action include:

--Adjusted Leverage above 3.0x in 24 months;

--Operating integration delays;

--Profitability margins reduction due to a competitive environment;

--Important decrease in FCF generation.

Future developments that may, individually or collectively, lead to positive rating action include:

--Deleverage beyond expectations for the following 24 months, supported by non-strategic asset sales or capital injections;

--Successful integration strategy in terms of profitability margins and FCF generation.

LIQUIDITY

Soriana's liquidity is sound. Fitch anticipates Soriana's liquidity position to remain sound after the acquisition of CCM's stores due to its FCF generation capacity and current cash balance. As of Sept. 30, 2015, the company's cash and marketable securities were MXN786 million, and it has no short-term debt. Fitch projects Soriana's cash balances to be around MXN2 billion in 2016-2018. Fitch expects Soriana's debt maturity profile to be manageable after the new debt comes online. The company good access to bank loans and capital markets provides financial flexibility to manage its debt profile in the medium and long term.

Fitch currently rates Soriana's National Scale ratings as follows:

--National scale long-term rating 'AA+(mex)';

--National scale short-term rating 'F1+(mex)';

--Certificados Bursatiles Program due May 2018 'AA+(mex)';

--Short-term rating on the Certificados Bursatiles Program due May 2018 'F1+(mex)';

--MXN10 billion local Certificados Bursatiles issuance 'AA+(mex)'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Nov. 9, 2015

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Metodología de Calificación de Empresas no Financieras (pub. 19 Dec 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=844890

Additional Disclosures

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