Bloomberg News

Billionaire Paulmann’s Purchase Hits Cencosud Debt: Andes Credit

November 29, 2012

Chilean billionaire Horst Paulmann’s debt-financed acquisition of Carrefour SA’s (CA) Colombian assets is turning Cencosud SA (CENCOSUD)’s bonds into the country’s worst performers.

The extra yield investors demand to own the Santiago-based retailer’s dollar notes instead of U.S. Treasuries has swelled 0.85 percentage point to 3.38 percentage points since Paulmann unveiled plans to sell $1 billion of bonds to help finance the acquisition of Carrefour SA’s Colombian assets on Oct. 19. Borrowing costs for similarly rated emerging-market companies rose 0.09 percentage point in the same period versus Treasuries, according to Bank of America Merrill Lynch index data.

Paulmann, who is making his biggest acquisition after turning his family-run restaurant in southern Chile into a $17 billion retail empire, has boosted Cencosud’s debt relative to earnings to about 5.5 times, according to Fitch Ratings estimates. That’s more than twice that of similar-rated European retailers such as Delhaize Group SA (DELB) or Koninklijke Ahold NV. (AH) Fitch Ratings placed Cencosud’s BBB- ranking, the lowest investment grade, on negative watch on Oct. 19 as the company’s acquisition pushes its debt load higher.

“If they continue with aggressive acquisitions in 2013 and don’t lower their debt, we would be looking at a possible downgrade,” Jose Vertiz, an analyst at Fitch in New York, said in a telephone interview. “They would have to reduce debt levels” to keep the investment grade.

Renato Fernandez, the head of corporate affairs at Cencosud, declined to comment in an e-mail on Nov. 26 when contacted by Bloomberg News, citing legal restrictions related to the sale of its bonds in the U.S.

Lagging Behind

Cencosud plans to sell $1.2 billion of 10-year bonds to yield 337.5 basis points over Treasuries, according to a person familiar with the deal. That compares with a spread of 230 basis points when the company issued 10-year securities in January 2011. The company increased the size of its planned bond sale from $1 billion.

The offering comes as the company’s bonds are lagging behind the debt of peers. The yield on the 2021 bonds was 4.66 percent, 112 basis points above the average yield on Chilean bonds in dollars, according to Bank of America Merrill Lynch’s Chile AAA-BB USD Emerging Market Corporates index. That spread was 58 basis points at the start of October.

Moody’s Investors Service, which rates the bonds Baa3, and Fitch said they would consider lowering their ratings on Cencosud’s debt to junk if the company can’t reduce its debt to less than 3.5 times earnings in the next few quarters.

Share Sale

“The debt level is high for the rating,” Cristobal Oyarzun, an analyst at Larrain Vial SA, who has a sell recommendation on Cencosud’s local-currency debt, said by telephone on Nov. 27 from Santiago. “I would buy if they get downgraded and the yield jumps.”

The 2 billion-euro ($2.6 billion) buyout of the Colombian assets of Boulogne-Billancourt, France-based Carrefour is Paulmann’s 17th acquisition. After the proposed share sale, the billionaire and his family will own more than 60 percent of the company.

His holding makes Paulmann, a 77-year-old who still speaks with a German accent after arriving in Chile as a teenager following World War II, the second-richest person in Chile, with an estimated net worth of $5.2 billion, according to the Bloomberg Billionaires Index.

Cencosud, which operates supermarkets and department stores in Latin America, is reviewing all its planned capital spending for the next 12 to 18 months and is “working on synergies and analyzing several other options,” Chief Executive Officer Daniel Rodriguez told analysts in a conference call Nov. 21.

‘Potential Interest’

“It’s still investment-grade and there’ll be a lot of potential interest,” in the offering, Michael Discher- Remmlinger, a portfolio manager who helps oversee about $3 billion in emerging-markets debt at Deka Investment GmbH, said by telephone from Frankfurt. “Being based in Chile, which is doing well economically with support from domestic demand, helps.”

He declined to say whether he plans to buy the new bonds.

Gross domestic product in Chile, the highest-rated country in Latin America, rose 5.7 percent in the third quarter, beating the 5.4 percent median estimate of analysts surveyed by Bloomberg.

The yield on Chile’s dollar bonds due in 2022 fell two basis points to 2.31 percent at 1:02 p.m. New York time. The two-year swap rate added three basis points to 5.19 percent in Santiago. The yield on Chilean five-year inflation-linked benchmark bonds rose one basis point to 2.53 percent.

Default Swaps

The cost of protecting Chilean bonds against default for five years dropped one basis point to 78 basis points, data compiled by Bloomberg show. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The peso is the world’s third-best performing currency this year, with an 8 percent rally against the dollar. It gained 0.4 percent to 479.15 per dollar today.

The yield on Cencosud’s 2021 bonds added one basis point to 4.67 percent, according to data compiled by Bloomberg.

Cencosud posted $1.2 billion profit from $4.4 billion of revenue in the first quarter. It made $811.6 million of that profit from supermarkets with revenue of $3.3 billion, according to data compiled by Bloomberg.

Paulmann is trying to raise the new cash after asking investors for $1 billion in an equity offering that closed in June. At the time he told investors it was to help reduce debt.

“Without the capital increase, the ratings would be under pressure,” Marianna Waltz, an analyst at Moody’s in Sao Paulo said by phone. “We don’t think they’ll be able to get the leverage down without it.”

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net


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