Fitch Rates Regal Forest Holding Co. Ltd.’s (Unicomer) Proposed Sr. Notes ‘BB-(exp)’

Fitch Ratings has assigned the following ratings to Regal Forest Holding Co. Ltd (RFH or Grupo Unicomer):

--Local currency Issuer Default Rating (IDR) 'BB-';

--Foreign currency IDR 'BB-';

--Proposed up to USD300 million senior unsecured notes due up to 2024 'BB-(exp)'.

The Rating Outlook is Stable.

The ratings reflect the company's leading business position in most of the 16 countries in Central America and the Caribbean and in two countries in South America, where the company has presence, through 827 units with 13 different store brands that sell consumer durable products. The ratings incorporate Grupo Unicomer's track record of stable operational results based on a business model that targets low-income to middle-income segments, which represent the majority of population in countries where the company operates, through several retail formats. The ratings consider the support and solid financial position of its shareholders Milady Group (Milady) from El Salvador and El Puerto de Liverpool (Liverpool) from Mexico (rated 'AAA(mex)'). Supporting the ratings is the company's positive cash generation throughout the business cycle.

Grupo Unicomer's ratings are constrained by the company's growth strategy through acquisitions, which has resulted in about USD216.5 million of working capital and USD94.8 million of Capex investments during the past 4.5 years. Ratings also factor in the credit risk exposure from its consumer finance business model with around 38 percent overdue accounts receivable as of Sept. 30, 2013 (past due accounts for 90 days or more were 5.4 percent); this risk is mitigated somehow by the company's track record of its collection procedures and the portfolio yield strategies.

The Stable Outlook incorporates the view that Grupo Unicomer's credit profile will remain stable in the medium term. Adjusted debt to EBITDAR is expected to remain stable at approximately 4.0 times (x) in the following years, absent additional acquisitions, in addition to stable portfolio credit quality.

KEY RATING DRIVERS:

Geographic and Format Diversification Supports Predictable Results

Grupo Unicomer's business model provides important integration and synergies among its retail division through a purchasing and logistic company that allows the company to be an efficient operator in many countries and having a competitive advantage in small territories such as those in the Caribbean through ownership or long term leases of prime spots in the islands. Geographic diversification allows the company to have a diverse revenue base due to different dynamics in each of the countries where RFH has presence. Different sources of revenue through product sales, extended warranties, consumer finance, and insurance products provide stability along with the wide array of products that the company offers (electronics, motorcycles, furniture, eyewear, etc.).

Growing Business - 2014 Revenue Growth Expected Around 17.5 percent

The company's operations have maintained a growing trend, with consolidated revenues of USD1.4 billion as of Sept. 30, 2013, representing a compound annual growth rate (CAGR) of 25.7 percent in the 2010-2013 period. Fitch expects that the company will continue benefiting from positive demand trends in discretionary products in the markets where it operates. During fiscal year ended 2014, Fitch projects the company's revenues will grow by approximately 17.5 percent due to the full year consolidation of recently acquired Gollo in Costa Rica, which only contributed 6.5 months during the fiscal year ended in March 2013. Fitch expects consolidated EBITDAR margin will range between 16 percent and 17 percent as a result of Gollo's full year incorporation.

Grupo Unicomer's Shareholders' Solid Position and Positive FFO and CFO provide Financial Strength

The ratings consider the support and solid financial position of its shareholders Milday (50 percent) and Liverpool (50 percent) with proven track record in retail since 1847. Milady's Portfolio includes department store chains and all Inditex's franchises in Central America. Liverpool, a department store with 101 units and 21 shopping malls in Mexico had USD5.6 billion in total revenues in the last 12 months (LTM) ended in September 2013 with USD1.0 billion of EBITDAR in the same period. Total assets were USD7.0 billion with USD4.0 billion in equity. Total adjusted debt/EBITDAR of 1.3x LTM ended in September 2013.

The ratings incorporate Grupo Unicomer's positive FFO and CFO generated throughout the business cycles. The company's cash flow is supported by its profitability and cost controls. Historically, CFO has been sufficient to fund capex and dividend payments; acquisitions of retail chains in Central and South America and the Caribbean have been financed mostly with debt. In 2010 and 2006, the company received equity injections of USD109 million and USD35 million, respectively, which was used to strengthen RFH financial position.

Aggressive Growth Strategy Through Acquisitions

Historically, Grupo Unicomer has grown through acquisitions; it started in 2000 with the acquisition of Dutch Group CETECO'sCentral America operations, La Curacao and Tropigas; in 2006 Regal acquired Courts Plc'sCaribbean operations. In 2011, the company acquired Artefacta in Ecuador and in 2012 Gollo in Costa Rica. This growth resulted in about USD253.1 million of working capital and USD103.3 million of Capex investments since year-end 2010. This situation of rapid growth constrains the ratings, given that it has been financed mostly with debt, although the shareholders contributed USD109 million in equity in 2010. Total lease adjusted debt to EBITDAR (EBITDA including operating leases) was 4.2x in last 12 months (LTM) ended Sept. 30, 2013; at the end of fiscal year (FY) ended March 2013, 2012, 2011 and 2010 were 4.6x, 3.8x, 3.5x, and 5.0x, respectively.

Negative Free Cash Flow (FCF) in Past Two Years

The company has recorded negative FCF during the past two years, due to the deployment of its expansion strategy. RFH generated negative FCF of approximately USD7.2 million and USD32.1 million in fiscal years ended March 2013 and March 2012, respectively. This was the result of the integration of the recently acquired operations which required working capital and capex investments. Fitch's calculation of FCF considers cash flow from operations less capital expenditures less distributed dividends. FCF is expected to turn positive or remain slightly negative during 2014-2015, once the new operations are fully integrated. The company's capital expenditures plan during the next two years is expected to reach annual levels of around USD39 million. Distributed dividends are estimated to be USD10 million in 2014 and 25 percent of previous year's net profit for the following years.

Consumer Finance: Moderate Level of Overdue Accounts Offset by Financial Spread

Grupo Unicomer's ratings factor in the credit risk inherent to its consumer finance business model. At Sept. 30, 2013, the company's portfolio had an average of 36.4 percent of overdue (balance) accounts compared to 34.5 percent, 38.3 percent and 41.1 percent at the end of fiscal year at March 2012, 2011 and 2010, respectively. This risk is partially mitigated by the company's efficient collections program and the track record of its portfolio yield. The company's past due accounts for 90 days or more were 5.4 percent as of Sept. 30, 2013 and 4.8 percent and 4.9 percent, during fiscal years ended in March 2013 and 2012 respectively; during the financial crisis period (2009-2010) this ratio increased to 6.4 percent, which Fitch considers manageable. The company's uncollectable reserves policy is based on a Roll Rate methodology, which predicts losses based on delinquency. The Roll Rate method measures the percentage of dollars that 'roll' historically from one range of delinquency to the next. At Sept. 30, 2013, the total reserves to +90 days past due balance was 0.86x.

Grupo Unicomer's commercial strategy considers a financial spread sufficient to cover credit risks associated to the portfolio. During the fiscal years ended at March 2013, 2012, 2011 and 2010 the portfolio yield after deducting uncollectable expenses and write offs was around 42.2 percent, 41.7 percent, 41.7 percent and 38.8 percent, respectively, and as of Sept. 30, 2013 it was 41.7 percent.

RATING SENSITIVITY:

Positive Rating Actions: Grupo Unicomer's ratings could be positively affected by significant improvement - above expectations already incorporated - in its positive cash flow generation, leverage and liquidity metrics.

Negative Rating Actions: A negative rating action could result from some combination of the following factors: significant deterioration in the credit quality of the company's consumer finance business, lower cash flow generation (EBITDA); and/or debt associated with acquisition activity.

Additional information is available at 'fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 5, 2013.

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=814801

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