Rating Action: Moody's affirms General Shopping Brasil's Caa3 corporate family rating, stable outlookGlobal Credit Research - 30 Aug 2022New York, August 30, 2022 -- Moody's Investors Service has affirmed General Shopping e Outlets do Brasil S.A.'s ('General Shopping', 'GSB' or 'the company') corporate family rating (CFR) at Caa3. Concurrently, Moody's also affirmed General Shopping Finance Limited's Caa3 unsecured debt rating as well as General Shopping Investments Limited subordinated debt rating of Ca.Although General Shopping's capital structure remains untenable in the long-term, the stable outlook considers the company has a sufficient cash position with improving cash flows from operations to continue to meet the debt service payments on the senior unsecured perpetual notes and to fund operations over the medium term.The following ratings were affirmed:Issuer: General Shopping e Outlets do Brasil S.A.Corporate Family rating affirmed at Caa3Issuer: General Shopping Finance LimitedBacked senior unsecured debt rating affirmed at Caa3Issuer: General Shopping Investments LimitedBacked subordinated debt rating affirmed at CaOutlook Action:Issuer: General Shopping e Outlets do Brasil S.A.Outlook remains StableIssuer: General Shopping Finance LimitedOutlook remains StableIssuer: General Shopping Investments LimitedOutlook remains StableRATINGS RATIONALEAlthough relatively small in scale, in terms of revenue, compared to other rated business service companies, GSB's operating performance has improved on a quarter or over quarter basis as a result of a combination of factors, including: 1) higher vaccination rates; 2) the loosening and eventual removal of all government-mandated restrictions on mall operations and occupancy limits leading to an increase in mall foot traffic; and 3) a boost in domestic consumption due to the decrease in international travel and the devaluation of the local currency against US dollar since the outbreak of COVID-19 global health crisis.However, the company's Caa3 CFR reflects the continued credit constraints that it faces as a result of a significantly smaller owned-mall portfolio, and the heavily debt burdened balance sheet with high and weak leverage metrics, reflected in the company's financial policy. In addressing these challenges, managment's evolving corporate restructure has resulted in a strategic transition toward an "asset-lite" business model with a focus on property and service management. GSB primarily manages the properties it had previously owned prior to an asset transfer that had started at the end of 2018 to a local Brazilian real estate investment fund. As of June 30, 2022, the company's managed portfolio comprised 15 malls, totaling approximately 292,000 square meters (SQM) of gross leasable area (GLA). Of the total owned mall portfolio, GSB holds equity stakes in 14 malls, ranging between 1% and 100% of ownership, with an average share of 31%, representing approximately 85,000 SQM of GLA. Predominantly concentrated in the state of Sao Paulo, the portfolio focuses on serving the Class B and C consumers.For the 12-month period ended on June 30, 2022, GSB's revenues and EBITA margin (Moody's adjusted) rose 18% and 19%, respectively, since year-end 2021. This is largely attributed to a combination of: 1) higher servicing revenues (parking, energy, water and property management), which represent close to 60% of total revenues generated); 2) higher minimum rents from the malls; and 3) higher rent collections and less tenant discounts needed to be offered. Compared to the second half of 2021, the company posted a consolidated net operating income and adjusted EBITDA growth multiple of approximately 1.46x and approximately 2.2x, respectively, reaching BRL 57.1 million and BRL 35.6 million in the first half of 2022.However, the improvement in operating performance is counterbalanced by the firm's heavy debt load. On a Moody's adjusted basis for the trailing 12-month period ended on June 30, 2022, GSB's debt to EBITDA and EBITA to interest coverage ratio were still elevated and weak at approximately 18.8x and 0.8x, although improved from 29.4x and 0.5x for full year 2021. As part of its liability management efforts, the company concluded another partial tender offer in February 2022 of approximately US $18.4 million on its 10% senior unsecured perpetual notes after originally seeking up to US $40 million. Moody's considers the partial tender offer as a distressed exchange - a technical default per its methodology. While the company's cash flows are expected to continue to recover, we do not anticipate the overall leverage profile to materially improve due to: 1) its US dollar debt load on the balance sheet, including the subordinated perpetual notes for which the company continues to defer interest payments as permitted under the indenture; 2) strong appreciation of the US dollar's against the Brazilian currency; and 3) an extremely low probability of an additional equity capital infusion from the major shareholders, who are the company's founding members and already own an approximate 70% stake in the firm.Moody's considers General Shopping to have sufficient liquidity to meet its debt service payments, supported by a cash balance of BRL 195 million, despite expectations of low retained cash flow over the next 12 months. Moody's anticipates the company will rely on a mix of cash on hand, cash flows from operations, local debt issuances and potential sales of ownership stakes in its remaining mall pool to finance its operations and growth over the next 12 to 18 months. Positively, the company has less than 2% of its total debt amortizing annually between the remainder of 2022 through 2025, before approximately US$47 million of bonds come due in 2026.While General Shopping's capital structure remains untenable in the long-term, the stable outlook considers the company has a sufficient cash position and recovering cash flows to meet its scheduled debt amortization payments over the next 24 months. The outlook also includes the expectation that earnings will gradually improve as mall operations continue to normalize. Moody's notes that the General Shopping Brasil will now be analyzed under the "Business and Consumer Services" methodology (the "REITs and Other Commercial Real Estate Firms Methodology" published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/74168 had been previously used) because of the amount of service revenues generated from the portfolio exceed rental revenues generated from the mall rents, as well as management's focus toward an "asset-lite" business model.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward rating movement is unlikely in the near term and would require General Shopping to improve its capital structure and scale, such that the following criteria are met on a recurring basis: 1) total revenues exceeded $600 million; 2) Debt to EBITDA were to decline to below 12.0x; and 3) EBITA to Interest coverage ratio were to rise to over 1.25x.The ratings would be downgraded if the company were to: 1) miss a debt service payment on its senior perpetual bond; 2) any additional debt restructuring that would entail significant losses to bondholders and 3) a deterioration in liquidity.Headquartered in Sao Paulo, Brazil, General Shopping e Outlets do Brasil S.A. [B3: GSHP3] is primarily a property management company, managing 15 malls and outlet centers, totaling approximately 292,000 SQM of GLA, and with an ownership interests in 14 of those properties with approximately 85,000 SQM of GLA. The company is a pioneer in the retail outlet format in Brazil.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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