Falabella Downgraded To 'BBB' From 'BBB+' And Placed On CreditWatch Negative Amid Business Disruptions From COVID-19

  • The COVID-19 outbreak has led to severe restrictions and lockdowns in most of the countries in which Chile-based retail and real estate company Falabella operates, leading to the closure of most of its department stores and malls.
  • We believe Falabella's operating results will be significantly weaker than we previously expected, pressuring credit metrics and liquidity.
  • On March 24, 2020, S&P Global Ratings lowered its ratings on Falabella to 'BBB' from 'BBB+' and placed them on CreditWatch with negative implications.
  • The CreditWatch placement reflects downside risks given the uncertainty about when cases of COVID-19 will peak and for how long the pandemic will persist, which could lead to a prolonged weakening of Falabella's liquidity and credit metrics.
SAO PAULO (S&P Global Ratings) March 24, 2020--S&P Global Ratings today took the rating action described above.
Sales and profits will materially decline over at least the near term due to the COVID-19 outbreak. COVID-19 is quickly spreading in Latin America and has led most governments in the region to take containment measures such as general quarantines or severe lockdowns. The downgrade reflects our expectation that most of the company's department stores (34% of revenues as of December 2019), malls (5%), and some home improvement stores (36%) would remain closed, at least for the next couple of weeks, but shutdowns could be extended. Furthermore, even if the closures are short-lived, weaker economic prospects and depressed consumer confidence will erode sales in discretionary categories. We now assume severe business disruption during the next two to three months with gradual normalization over the second half of the year. We previously expected that following the Chilean social unrest in 2019, the company would register mid-single digit revenue growth and a recovery in margins and EBITDA generation this year. Under our revised base case, we now estimate that revenues could fall further by about 4%-5% this year and adjusted EBITDA margin will remain about 10%. This could lead to adjusted leverage deteriorating to slightly above 4.0x from about 3.8x in 2019 and from our previous expectation of 3.0x-3.5x in 2020. The ability to contain the virus, the extension and duration of quarantines, and consumers' willingness to self isolate are key variables.
We believe Falabella might benefit against its peers because of its digital and logistics capabilities, because consumers may increasingly use e-commerce to purchase goods during the outbreak. We also expect to see solid performance in its supermarkets business in Chile and Peru (about 20% of revenues). However, we do not believe it will be enough to offset the impact of the decline in store traffic.
We expect to resolve the CreditWatch as we learn more about the effects of the coronavirus on Falabella's operations and financial position. We would likely lower our ratings if stores and shopping malls are closed for longer than we expect, causing the company to report weaker-than-expected credit metrics and liquidity. If the company's liquidity sources over uses ratio for the next twelve months narrows to closer to 1.2x or even falls below that, we could lower the ratings. Additionally, we could also lower the ratings if we expect Falabella to maintain debt to EBITDA persistently above 4.0x and funds from operations (FFO) to debt below 20%.
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