27/4/2020 Fitch Affirms InRetail Pharma's and InRetail Real Estate's IDRs at 'BB+'; Outlook Stable

RATING ACTION COMMENTARY

Fitch Af rms InRetail

Pharma's and InRetail
Real Estate's IDRs at
'BB+'; Outlook Stable
Fri 24 Apr, 2020 - 16:56 ET

Fitch Ratings - New York - 24 Apr 2020: Fitch Ratings has af rmed the Long-
Term (LT) Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings
(IDRs) of InRetail Pharma S.A. and its senior unsecured bonds at 'BB+'. Fitch has
also af rmed the LT FC and LT LC IDRs of InRetail Real Estate Corp. at 'BB+'.
Fitch has also af rmed the senior unsecured bond issued by InRetail Shopping
Malls at 'BB+'. The Rating Outlook is Stable.

The ratings re ect InRetail Pharma's and InRetail Real Estate's strong linkage
with its parent, InRetail Peru Corp., the parent's consolidated credit pro le and
the solid business positions of its supermarket, pharmacy and shopping mall
subsidiaries.

The rating af rmation and Stable Outlook re ect the view that InRetail Peru's
adequate nancial exibility and resilient business model will allow it to
successfully navigate the challenging 2020 scenario with the increased downside
risks from the economic implications of the coronavirus pandemic, which is
projected to cause the Peruvian economy to contract by more than 4%. The
ratings af rmation factors in some deterioration in InRetail Peru's credit metrics
during 2020, while recovering during 2021. In the current macro-business
environment, Fitch views InRetail Peru's supermarkets and pharmacy retail

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businesses as defensive, which should compensate for the expected credit

deterioration in the company's shopping malls business.

KEY RATING DRIVERS

Strong Parent/Subsidiary Linkage: InRetail Peru's consolidated nancial pro le is

a key credit driver for InRetail Pharma's and InRetail Real Estate's ratings, due to
the strong parent/subsidiary linkage. InRetail Peru manages and owns 100% of
InRetail Real Estate Corp. (BB+/Stable), 99.98% of Supermercados Peruanos S.A.
and 87.02% of InRetail Pharma (BB+/Stable). Fitch views these businesses as
core and strategically important for InRetail Peru's business model. We consider
parent/subsidiary strategic and operational linkages among InRetail Peru and its
subsidiaries as strong based on a common management team, decision-making
process and lack of restrictions in cash movements.

Adequate Liquidity: Fitch views the company's liquidity and nancial exibility as
adequate due to InRetail Peru's solid cash position, proven access to the capital
markets and manageable debt maturities. InRetail Peru has a consolidated cash
position and short-term debt of PEN762 million and PEN386 million,
respectively, as of Dec. 31, 2019. The company does not have any material
principal debt payment during 2020-2022. Fitch forecasts the company's
coverage ratio, measured as total EBITDAR/(interest paid plus rents), at around
2.4x during 2020-2021, versus the average level of 2.6x observed during 2018-
2019. The company has reduced its 2020 capex plan to preserve liquidity. The
company's FCF generation, measured as cash ow from operations after working
capital needs minus capex and paid dividends, is expected to be neutral during
2020.

Supermarkets and Pharmacy, Defensive Businesses: InRetail Peru's revenue,

EBITDAR, and cash position in FY 2019 was PEN13.1 billion, PEN1.8 billion, and
PEN762 million, respectively. The supermarket, pharma, and real estate
businesses represented 27%, 54%, and 19%, respectively, of the company's
consolidated 2019 EBITDA. Fitch's rating base case considers the supermarket
and pharmacy retail formats to grow in the low to mid-single digits during 2020.
These two businesses, which represent approximately 80% of InRetail Peru's
total revenues, are viewed as more defensive in the current coronavirus macro-
business environment. Supermarket sales trend have spiked in recent weeks
during the lockdown period.

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Shopping Mall Business More Exposed: InRetail Peru's shopping malls business is
vulnerable to the current scenario. In order to preserve liquidity, the company is
slashing operating costs to minimal levels and putting any capex on hold over the
next months. The coronavirus led to mall closings in Peru, with only grocery and
drug stores allowed to remain open. For the stores remaining closed due to the
lockdown, the company has taken the commercial decision of not charging any
rents for those tenants. Fitch's base case assumes the company's shopping mall
operations will remain closed between two to three months, resulting in the
company shopping mall's revenues declining in the 20% to 25% range in 2020
versus 2019 levels. Shopping mall operations are expected to normalize during
second-half 2020.

2020-2021 Leverage Trend Incorporated: The ratings incorporate some

deterioration in InRetail Peru's leverage metrics in 2020 and posterior recovery
toward 2021. InRetail Peru's consolidated net adjusted debt/EBITDAR was 4.1x
in 2019 (4.5x in 2018). The company's retail-only net adjusted leverage was 3.7x,
while its real-estate net adjusted leverage was 5.9x in 2019. Considering each
businesses' operational performance through the pandemic, Fitch expects
InRetail Peru's consolidated net adjusted leverage to be 4.5x and 3.9x in 2020
and 2021, respectively. The company's retail-only net adjusted leverage is
viewed as stable reaching 3.7x and 3.4x in YE 2020 and YE 2021, respectively.
The company's real-estate net adjusted leverage is anticipated to deteriorate and
reach 8.3x in 2020 and to recover to 5.4x in 2021, when factoring in the expected
deterioration in the shopping mall business.

Manageable FX Risk: InRetail Peru counterbalances a revenue/debt currency

mismatch using hedged instruments. The company's total revenue is 90%
Peruvian Nuevos soles denominated, while total debt is 60% U.S. dollar
denominated. InRetail Peru's main component in its debt structure is the debt
held by its subsidiaries InRetail Pharma's USD400 million unsecured senior notes
due in 2023 and InRetail Real Estate's USD350 million unsecured notes due in
2028. The company has hedged debt covering the principal amounts of the U.S.
dollar denominated unsecured senior notes. Fitch estimates local currency
depreciation to the U.S. dollar of 30% would not have a material effect on the
company's credit metrics, as the use of hedged debt counteracts FX volatility.
Further, Peru's currency is viewed as one of the less volatile currencies in the
region, with a year to date depreciation versus the dollar of 3%.

DERIVATION SUMMARY

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InRetail Peru's consolidated nancial pro le is a key credit driver for InRetail
Pharma's ratings, due to the strong parent/subsidiary linkage. InRetail Peru Corp
is well-positioned relative to its regional retail peers in the Peruvian market due
to its diversi ed business pro le, with activities in food and pharmacy retail, and
shopping malls, as well as its solid competitive position in each business segment.
InRetail Peru Corp's scale and geographic diversi cation are considered weaker
when compared with regional peers such as Falabella S.A. (BBB/Negative),
Cencosud S.A. (BBB-/RWN), and El Puerto de Liverpool, S.A.B. de C.V.
(BBB+/Stable). InRetail Peru Corp.'s 2019 consolidated net adjusted leverage at
4.1x is viewed as similar when compared with Falabella's 4.3x and Cencosud's
3.9x, and weaker than Liverpool's negative 0.01x, as of Dec. 31, 2019.

InRetail Peru and Cencosud operate retail formats that are more oriented to the
food segment, which is more defensive in the current coronavirus macro-
business environment. Falabella and Liverpool operate retail formats more
oriented to the non-food segment, which is more vulnerable in the current
scenario of extensive nationwide lockdowns. Fitch expects InRetail Peru to
manage its consolidated net adjusted nancial leverage, measured as net
adjusted debt/EBITDAR, in the 4x to 5x range during 2020 due to the
coronavirus impact, and to deleverage as operations normalize during 2021.

KEY ASSUMPTIONS

Fitch's Key Assumptions within Our Rating Case for the Issuer Include:

InRetail Peru

- Consolidated net adjusted debt/LTM EBITDAR around 4.5x in 2020 and 4x in

2021;

- Neutral FCF in 2020;

- Interest coverage (EBITDAR/interest + rent expenses) consistently around 2.3x

and 2.6x in 2020 and 2021, respectively.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating

Action/Upgrade:

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Net adjusted leverage, measured as total adjusted net debt/EBITDAR,

consistently below 3.5x at InRetail Peru;

Increased revenue and geographic diversi cation at InRetail Real Estate.

Factors That Could, Individually or Collectively, Lead to Negative Rating

Action/Downgrade:

Net adjusted leverage, measured as total adjusted net debt/EBITDAR,

consistently above 5.0x at InRetail Peru;

Weak same-store sales and business trends at InRetail Pharma and/or

Supermercados Peruanos;

Increasing vacancy rates at InRetail Real Estate.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-

case rating upgrade scenario (de ned as the 99th percentile of rating transitions,
measured in a positive direction) of three notches over a three-year rating
horizon; and a worst-case rating downgrade scenario (de ned as the 99th
percentile of rating transitions, measured in a negative direction) of four notches
over three years. The complete span of best- and worst-case scenario credit
ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case
scenario credit ratings are based on historical performance. For more
information about the methodology used to determine sector-speci c best- and
worst-case scenario credit ratings, visit
https://www. tchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY

DRIVER OF RATING

The principal sources of information used in the analysis are described in the
Applicable Criteria.

ESG CONSIDERATIONS

ESG issues are credit neutral or have only a minimal credit impact on the
entity(ies), either due to their nature or the way in which they are being managed
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by the entity(ies).  For more information on Fitch's ESG Relevance Scores, visit
www. tchratings.com/esg.

RATING ACTIONS

ENTITY/DEBT RATING

InRetail  
Shopping
Malls

• senior LT BB+  Af rmed

unsecured

InRetail LT BB+  Af rmed

Pharma S.A. IDR

LC LT BB+  Af rmed
IDR

• senior LT BB+  Af rmed

unsecured

InRetail Real LT
VIEW ADDITIONAL RATING DETAILS
BB+ Af rmed

Additional information is available on www. tchratings.com

APPLICABLE CRITERIA

Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019)

Corporate Rating Criteria (pub. 27 Mar 2020) (including rating assumption
sensitivity)
Sector Navigators-Addendum to the Corporate Rating Criteria (pub. 27 Mar
2020)

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to

criteria providing description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)

ADDITIONAL DISCLOSURES
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Dodd-Frank Rating Information Disclosure Form

Solicitation Status
Endorsement Policy

ENDORSEMENT STATUS

InRetail Pharma S.A. EU Endorsed

InRetail Real Estate Corp. EU Endorsed
InRetail Shopping Malls EU Endorsed

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