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As Chilean Economy Cools, Corporates Target Hedging

Managing the financing strategy for any company, whether a large multinational or small start-up, is challenging during the best of times, and when an economy slumps, most CFOs will tell you that how you come out during an upturn largely depends on how you position yourself before the downturn.

Apr 19, 2017 // 12:55PM

We speak with Rodrigo Larrain, CFO at Cencosud, Chile’s leading retailer, about how the company navigated its growth and evolved its financing strategy during the country’s economic boom, and how it is positioning itself for the road ahead.

Can you give us a view on the outlook for the retail sector in Chile? What kind of headwinds is the sector facing currently?

The retail sector has been affected – as other industries – by the slowdown in the economic activity in Chile, a year in which consumers and investors grew increasingly cautious about their exposure. However, the industry continues to be very dynamic and has proven to be resilient and healthy, with the main players maintaining same-store sales growth above inflation through the downturn cycle.

Retailers, as well as the lodging and services sectors, have also benefited from the so-called "Shopping Tours" to Chile, with a growing flow of South American tourists, with Argentines leading this trend – increasing visits 75% in the last two years. Consumers have been encouraged by lower retail prices than in their countries, a greater variety of products and higher availability of large established international brands.

Retail in Chile is highly developed and the competition is – and will continue to be – intense. Several international retail players have landed in the Chilean market in the last few years, as well as numerous specialized and Fast Fashion brands. On top of that, the expansion in additional GLA has led to high penetration rates in most of the sub-markets. Local retailers also face increased competition from global e-commerce players.

Even so, e-commerce presents a tremendous growth opportunity for traditional retailers in Chile, as consumers move towards internet retailing and grow their confidence in the safety of online transactions. Big players in Chile have been investing in developing omnichannel capabilities and have the ability to leverage from their network of physical stores and established logistics, in addition to the experience and knowledge of customers, and brand recognition, all of which constitutes a strategic asset to compete in the digital world.

Sluggish economic activity, low consumer confidence, and uncertainty in an election year will continue to provide headwinds in the Chilean market throughout 2017. However, we remain confident that we will be entering into a more accelerated recovery by year end. Investors also support this positive view as the IPSA Index of main publicly traded companies in Chile increases over 15% in the 1st quarter of the year. I think we are at an inflection point in terms of cycles and expectations for future growth over the next few years.

What are some of the main strategic initiatives in place at Cencosud, both broadly and within the treasury?

Between 2002 and 2012, we experienced a period of aggressive expansion throughout South America, with the last big acquisition being the Carrefour operation in Colombia. During that period, we grew our operations from two to five different countries, and largely financed that growth through a combination of equity increases and debt. In 2013, we reached peak leverage, and our Investment Grade credit rating was challenged with a negative outlook. That year was also an inflection point for our broad integration strategy, which in the years that followed, focused on gaining efficiencies through cost rationalization on one hand, and deleveraging on the other.

So, after several years of inorganic growth and regional expansion, our focus is being placed on enhancing our business position and profitability in each market – together with gaining a greater edge in the e-commerce market. In 2017, we will continue to advance on the three defined strategic pillars: a) Reinforcement of our value proposition, shopping experience and customer loyalty; b) omnichannel developments, innovation and leadership in new trends; and c) efficiency, productivity and financial discipline.

On the finance side, we have focused our efforts on improving liquidity, reducing our cost of debt, and managing foreign exchange risk and interest rate exposure. We are also working very closely with our business units to monitor and improve our working capital requirements.

How is Cencosud insulating itself from increasing global interest rate / currency volatility? Has global volatility more broadly influenced the company’s treasury management strategy?

Although most of our debt is in US dollar denominated bonds, we have followed an exchange and interest rate risk strategy by hedging US dollar exposure of the balance sheet into Chilean Pesos through cross currency swaps. Given increased global volatility, we have taken a more conservative approach by increasing our fixings, and as of 31 December 2016, only 16% of our net debt is exposed to US dollars and 26.3% is exposed to floating rates, levels that we consider reasonable for the company.

What is Cencosud’s borrowing strategy for 2017? Is the company looking to tap into new markets for liquidity? What are some of the main factors influencing the company’s borrowing strategy?

Over the past few years, we sold a range of non-core assets and a majority stake in our financial services business in Chile, which freed up some capital to reinvest into the company and take out existing debt. We also issued a total of US$1bn in bonds in 2015, which allowed us to refinance a number of short term maturities.

In late 2016, we conducted a very successful liability management operation – issuing the equivalent to about US$280mn in December, taking advantage of strong liquidity and convenient fixed interest rates in the Chilean debt capital market – which allowed us to achieve a comfortable debt amortization schedule with limited installments due in the next four years, between 2017 and 2020, leaving enough room to serve Capex and other requirements with our own cash generation. That liability management exercise also allowed us to reduce our overall cost of debt.

We have also increased our hedging to the level defined in our internal policy. Therefore, we are not anticipating any transaction in the market for this year. However, we will continue to monitor liability management opportunities which could provide additional strength to our balance sheet and cost of debt.  

This year looks set to be economically more challenging in Chile, particularly if you look at the growth outlook. What kind of advice would you give to other CFOs managing their businesses in a stalled economy?

Under volatile and low growth markets I would advise to increase liquidity, maintaining low short-term debt due and reducing exchange rate exposure. Fortunately, we have a very well developed and deep local financial sector where companies can take advantage of liquidity in the bond markets and/or established relationships with local banks. I would advise them to be proactive in refinancing and taking on opportunistic liability management windows to relieve any financial pressure while the markets are strong, and to keep on top of working capital requirements and cash flow projections.

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