Fitch Affs Grupo Elektra's FC, LC Rtgs at 'BB-'; Stable Outlook

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Report Type :Press release Published on:Wednesday, September 3, 2003 Provider:Fitch Mxico S.A. de C.V. Page Count: 1 Frequency: Relativa Author:Giovanna Caccialanza, CFA / Adriana Beltrn G. Email author:giovanna.caccialanza@fitchratings.com; adriana.beltran@fitchmexico.com

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03 Sep 2003 3:08 PM Fitch Ratings-New York-September 3, 2003: Fitch Ratings has affirmed the senior unsecured foreign currency and local currency ratings of Grupo Elektra, S.A. de C.V. (Elektra), as well as its rating on Elektra's US$275 million 12% senior notes due 2008, at 'BB-'. Fitch Ratings has also affirmed the national scale rating of Elektra at 'F2(mex)'. The Rating Outlook for all ratings is Stable. The ratings are based on the company's leading market position as a specialty retailer of electronics, appliances and furniture, a strong brand name and extensive nationwide store network and the ability to provide customer financing. The installment sales program available to Elektra's low to middle-income customer base creates additional demand and provides a competitive advantage. Customer financing has also helped limit revenue volatility. Due to its strong business position and large scale economies, Elektra maintains above average profit margins. Because revenues are largely peso-denominated while the debt is mostly dollardenominated, the company is exposed to long-term foreign-exchange fluctuations. Elektra has indicated it intends to reduce such exposure and has recently repaid dollar debt with cash at hand and the proceeds from the issuance of peso-denominated short-term notes and the sale of assets to Banco Azteca. Customer financing has been the pillar of Elektra's retail strategy. In March 2002, Elektra received a license from the government to operate a bank, which began operations in October 2002. Credit income from customer financing in Mexico, historically an important contributor to profitability accounting for approximately one fifth of revenues, will now be earned at Banco Azteca. Banco Azteca, an unrestricted subsidiary, is not a guarantor of Elektra's 12% senior notes and is prohibited to pay dividends until 2006. Costs and expenses related to the provision of credit are also being transferred to Banco Azteca, including the costs of financing, credit investigation and collection, the provision for doubtful accounts and a portion of rent and corporate expenses. The creation of Banco Azteca will benefit Elektra by broadening the range of sources available to fund an expanding consumer credit portfolio. As a financial institution, Banco Azteca may fund itself at a lower average cost than Elektra. The bank also increases the flow of existing and potential customers into retail stores. At June 30, 2003, Banco Azteca had 813 branches located within Elektra's retail stores, total deposits of approximately US$315 million, total loans of approximately US$360 million and

total capital of approximately US$55 million. Deposits have grown at a fast pace since the bank's inception. Services have initially focused on savings accounts, consumer financing of Elektra's durable purchases and personal loans, but will expand to debit cards, ATM services, investment accounts, automatic service payments, insurance products, used automobile loans and mortgages for low-income housing. The expansion of banking services well beyond those historically provided by Elektra may require additional capital contributions. Over the past several years, Elektra has been able to generate adequate cash flows and profitability margins despite challenging economic conditions and the deceleration of consumption in Mexico. Although competition has increased, with other retailers now offering credit to Elektra's target market, margins have remained strong due to cost and expense controls and improved credit terms with suppliers, as a result of credit sales now being funded by Banco Azteca. At June 30, 2003, Elektra's on-balance-sheet debt was approximately US$374 million, representing a reduction of US$112 million from Dec. 31, 2002. Elektra also completed the amortization of its off-balance-sheet securitization program for approximately US$227 million. Credit protection measures should remain consistent with Elektra's existing rating category. Fitch Ratings estimates that by the end of 2003, the ratio of total debt-to-EBITDAR should be around 2 times (x) and the ratio of EBITDAR-to-interest expense plus rent should be around 3x. Liquidity is adequate, with cash balances of more than US$270 million at June 30, 2003. Elektra has moderated its growth strategy from previous years. Retail capital expenditure needs are modest in relation to EBITDA and should be financed with internally generated cash flow. Elektra is a specialty retailer of consumer electronics, appliances and furniture. At June 30, 2003 the company operated the following store formats in Mexico: Elektra and MegaElektra (631 stores), Bodega de Remates (90 stores) and Salinas y Rocha (92 stores). Elektra also operated 63 MegaElektra stores in Central America and Peru. In Mexico, the company offers consumer financing and other banking services through its subsidiary Banco Azteca. Contact: Giovanna Caccialanza, CFA +1-212-908-0898, New York, or Adriana Beltran, +52-818335-7239, Monterrey, Mexico.