Fitch Ratings has assigned a 'BBB-' expected rating to Intercorp Peru Ltd.'s (Intercorp) proposed local-currency denominated senior unsecured notes. The proceeds from the issuance are expected to be used entirely to refinance debt
Fitch currently rates Intercorp as follows:
--Foreign currency Issuer Default Rating (IDR) 'BBB-';
--Local currency IDR 'BBB-';
--Proposed USD denominated senior unsecured notes 'BBB-' (expected rating).
The Rating Outlook is Stable.
Proceeds from the proposed issuances will be used primarily to refinance existing debt.
Intercorp's credit ratings reflect the company's diversified portfolio of operations, solid and leading market position in most of the industries in which it participates, positive medium-term outlook growth related to its core businesses; and its business strategy supported by the integration of financial, retail, and real estate networks oriented to attend growing needs of Peruvian consumers.
Intercorp's main subsidiaries are Intercorp Financial Services Inc. (IFS) and Intercorp Retail Inc. (Intercorp Retail). The ratings incorporate the view that the company's expected dividend flow structure should continue being driven by its financial services business - IFS's banking, insurance and wealth management operations - during the next few years. The company's retail and real estate operations are not expected to provide material levels of dividends in the short term as these segments are going through the completion of a strategic capex plan.
Intercorp relies on dividends from operating subsidiaries to service its debt. The company maintains dividend control as all the dividends received by Intercorp are from majority owned or fully controlled companies. The credit ratings incorporate the structural subordination of the debt held by Intercorp versus the debt held by its operating companies, which is partially mitigated by Intercorp's diversified business portfolio, moderate leverage, and good liquidity resulting from high and stable expected interest coverage ratios and manageable debt payment schedule, with no material debt payments due during the next several years.
KEY RATING DRIVERS
Financial Services Driven Dividend Stream
The company's business position in the Peruvian financial services business is viewed as solid and sustainable, which supports expectations of continued stable dividends stream from these operations to Intercorp over the medium term. IFS is the second largest provider of consumer loans (retail loans other than mortgages) in Peru in terms of total loans outstanding, the leading provider of annuities in terms of premiums, and have a leading and growing wealth management business.
Interbank, Intercorp's main source of cash flow generation - representing approximately 50% of the company's total dividends received, is rated BBB+/ Outlook Stable by Fitch. Interbank's ratings are driven by its consistent, strong performance; robust credit process; good asset quality; sound franchise; adequate capital; positive economic and regulatory environment; and improving funding base.
Income Stream Quality Incorporated
The rating considers the diversification and quality of Intercorp's dividends flow. During 2012 and 2013 the company received dividends of S/.334 million (USD119 million) and S/.321 million (USD115 million), respectively. This level of received dividends was generated entirely by the financial services operations with the banking (Interbank), insurance (Interseguro), and wealth management (Inteligo) operations making approximately 53%, 29%, and 18% of the total received dividends during 2012 - 2013 period; the dividends composition is not expected to materially change during 2014-2016 period. The company's retail and real estate operations are considered to start adding to Intercorp's received dividends by 2017.
Moderate Gross Leverage
The company's financial gross leverage, measured by the total debt to received dividends ratio, is expected to remain moderate at levels around 3.5x during the 2015-2017 period. Intercorp is forecasted to generate annual levels of Funds Flow from Operations (FFO), measured as received dividends minus cash interest, cash taxes, SG&A expenses, board expenses and others, of approximately S/.300 million (USD100 million during 2015-2017 period). This expectation also incorporates annual received dividends of around S/.400 million during the period. The company ended Sept. 30, 2014 with a total debt of S/.1.1 billion, which includes approximately S/.250 million in intercompany loans. The company is anticipated to end 2014 with a total gross leverage, measured as total debt/ received dividends ratio, of 3.2x; dividends are from a solid investment grade financial services business.
Retail Operations, Limited Dividend Generation in the Short Term
Intercorp Retail manages a leading multi-format retail operation in Peru, which primarily includes Supermercados Peruanos, Eckerd Peru, the operator of the InkaFarma brand, and InRetail Real Estate. Intercorp Retail is rated BB by Fitch, which reflects its diversified business model, continued growing operations, high leverage, and solid market position in Peru's supermarket, pharmacy retail, and real estate segments. Under its Real Plaza brand, the company operates 20 shopping malls and manages approximately 610 thousand square meters (m2) of gross leasable area (GLA). Under its real estate operations, Intercorp maintains unencumbered assets for an estimated market value of USD800 million. The capex requirements for the retail and real estate operations are already secured; this segment is projected to start generating dividends toward 2017.
Adequate Liquidity
The company's financial strategy considers the refinancing of its unsecured notes lowering Intercorp's financial costs and extending the average life of the financial debt. 2015 annual gross interest expenses - post refinancing - are estimated around S/.85 million. Intercorp's liquidity post refinancing is viewed as good considering the company will not face any major debt payment schedule during the next five years while interest coverage ratios are anticipated to remain high. The company interest coverage, measured as received dividends to interest expenses ratio, is forecasted in the 5x to 6x range during the 2015-2017 period. In addition, the company's liquidity is further supported by keeping investment for sale, consisting of Peruvian government bonds, with a market value of approximately USD20 million, which could be disposed to provide an important source of financial flexibility. Intercorp's annual dividends distributed to shareholders are anticipated around S/. 80 million during 2015-2016 period.
RATING SENSITIVITIES
The Stable Outlook for Intercorp's ratings incorporate the view that the company will successfully execute its refinancing strategy and manage its gross financial leverage and interest coverage ratios at levels around 3.5x and 5x, respectively, during the 2015 - 2016 period.
Positive: A combination of the following future developments could lead to positive rating actions:
--Received dividends significantly above expected levels;
--Enhanced performance of the company's operating assets;
--Significant development in the company's gross financial leverage and interest coverage at levels above expectations incorporated in the ratings;
--Material improvement in the company's liquidity position expected to be sustained over the medium term;
--Upgrade in the rating of Interbank and/or increased diversification of dividend flows to the parent.
Negative: A combination of the following developments could lead to negative rating actions:
--Failure to maintain expected dividends levels;
--Material deterioration in gross financial leverage and interest coverage ratios from levels incorporated in the ratings;
--Deterioration in the company's liquidity by reducing assets available for sale or increasing short-term debt levels from current levels.
--Downgrade in the rating of Interbank and/or reductions in dividend flows to the parent.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 2014);
--'Rating Investment Holding Companies' (December 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Rating Investment Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741159
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978976
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