Fitch Ratings Downgrades Grupo Elektra over Governance Concerns

Fitch Ratings has downgraded Grupo Elektra's credit rating, citing concerns over corporate governance practices within the broader Grupo Salinas conglomerate, selective defaults by TV Azteca, and local bond repurchases. 

The downgrade by Fitch impacted Grupo Elektra's long-term local and foreign currency ratings, which were lowered from 'BB' to 'BB-', while its national long-term rating shifted from 'A+' to 'A(mex)'. Additionally, Elektra's short-term rating saw a downgrade from 'F1+' to 'F1(mex)'. 

“Fitch believes that Grupo Salinas' corporate governance practices add uncertainty about similar practices at the Elektra level. The agency believes that TV Azteca's debt default and Total Play's private bond exchange affirm Fitch's previous assessment regarding the differentiated treatment of Grupo Salinas companies to different investor groups. Fitch believes these practices could impact Elektra's ability to access financing,” reads Fitch Ratings’ press release. 

Despite the lower rating, Grupo Elektra reported a positive financial performance for the fourth quarter of 2023 with consolidated revenues going up by 9% to MX$52.65 billion. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) witnessed a 45% increase to MX$4.72 billion compared to the same period last year.

The growth in financial revenues, reaching MX$29.48 billion, largely reflects a 15% increase in Banco Azteca Mexico's revenues, driven by the continued expansion of the gross credit portfolio. The group's banking branch reported a capitalization index of 15.01% and a liquidity coverage ratio of 1,055%. 

Despite Elektra's financial performance, concerns linger regarding Grupo Salinas' governance practices and their potential impact on Elektra's financing accessibility. Fitch's analysis primarily focuses on Elektra's retail business, excluding its financial arm, Banco Azteca. However, given the link between Elektra and Banco Azteca, Fitch acknowledges that the latter’s competitive position could be bolstered by the bank’s performance. 

“The commercial business complements the sale of its products through the credit offered by Banco Azteca and, in turn, Banco Azteca maintains a customer base composed mainly of buyers from the Elektra and Salinas y Rocha commercial stores,” according to Fitch. 

Fitch anticipates that the impact of the rating downgrade will be short-lived, with Elektra's adjusted gross leverage metrics for its retail segment expected to return to approximately four times what it reported in 2023 by the end of 2024 and remain within that range thereafter.

The company's consolidated performance in 2023 slightly missed expectations for earnings recovery. However, investments in logistics and IT began yielding gradual returns, and the company demonstrated agility in adapting its business model and strategy execution to align with current trends, according to Grupo Elektra’s report. 

The agency forecasts Elektra's gross credit portfolio to grow by around 8% in 2024, with a consolidated capital expenditure of approximately MX$8 billion.