December 14, 2016 / 7:07 AM / 2 years ago

Fitch Revises Casino's Outlook to Negative, Affirms at 'BBB-'

(The following statement was released by the rating agency) PARIS/LONDON, December 14 (Fitch) Fitch Ratings has affirmed Casino Guichard-Perrachon SA's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. Fitch also revised the Outlook on Casino's IDR to Negative from Stable. A full list of rating actions is below. Future deleveraging relies on the operating performance and cash generation of Casino's main operations in France and Brazil, as major disposals have been completed. The Outlook revision reflects risks related to the timing and scale of operating performance and cash generation improvement in these main regions. We expect further disposals of non-core assets in 2017, which could assist deleveraging, but these are not of the same order of magnitude. Further progress in funds from operations (FFO)-adjusted net leverage (proportionally consolidated) moving towards 4.0x will be slower than previously anticipated and may not be completed by end-2017, as we projected in our estimates in December 2015. KEY RATING DRIVERS Significant Disposals Positive for Leverage The well-executed disposal of Big C Thailand and Vietnam in 1H16 has allowed group net debt to reduce by EUR4.3bn at group level and EUR3.9bn at Casino holding level. This is a key support for the group's deleveraging plan and financial flexibility at the 'BBB-' rating. Fitch expects group proportionally consolidated leverage will fall to 5.4x at end-2016, down from 6.7x at end-2015. Fitch also positively factors in management's past and renewed commitment to using asset disposal proceeds for debt repayment. Fitch calculates that gross debt will have significantly decreased by more than 35% between end-2014 and end-2017, to EUR9bn. Further Deleveraging Challenging Proportionally consolidated FFO-adjusted net leverage should reduce to around 4.5x by end-2018. This trend remains positive but slower than in our forecasts in late 2015. With the sales of Big C Thailand and Vietnam now completed, future deleveraging depends on EBITDA performance in France and Brazil. These markets remain challenging and our Negative Outlook is based on our assumption that the improvement in profitability in 2017 and 2018 may not be sufficient to reduce leverage to 4.0x in a reasonable time. Casino has got the ability to pursue other cash preservation measures, for example further smaller divestments, to further strengthen its balance sheet at the current rating level. Reduced Capital Structure Imbalances Casino's disposal plan has benefited the holding company, with a large part of disposal proceeds repaying debt at this level. Fitch therefore expects the gap between holding and group proportionally consolidated FFO-adjusted net leverage to fall to 1.0x in 2016 from 3.9x in 2014 and remain below this level over the next three years. This issue, largely addressed in 2016, follows Casino's past acquisitive stance, which had created capital structure imbalances reflected in a significant mismatch between debt (mostly at holding level) and cash (mostly located in partly owned subsidiaries) across the group. Moderate French Turnaround Prospects Fitch expects Casino's French EBITDA to strongly recover to EUR920m (4.9% margin) in 2016, up from EUR726m (3.8%) in 2015. This should be supported by a return to like-for-like sales growth and gross margin optimisation through purchasing agreements and cost base streamlining. However, we believe limited like-for-like sales growth due to continuing fierce competition and diminished headroom regarding further cost base reduction will allow only moderate EBITDA uplift in 2017-2019. Brazilian Subsidiary Downgraded In October 2016 Fitch downgraded Grupo Pao de Acucar's (or Companhia Brasileira de Distribucao; GPA) Long-Term National Rating to 'AA(bra)' from 'AA+(bra)'. The downgrade reflected the weakening of its cash flows and leverage metrics following significant deterioration of the group's operating performance in 2015, largely driven by the group's consumer electronics business Via Varejo and e-commerce activities. Management's measures to adapt operations to the deteriorated consumer environment should support some top-line growth from 2016, albeit from a low base. Casino's 33.2%-owned Brazilian subsidiary represented around 30% of proportionally consolidated FFO. Fitch believes the move to more discount formats and cash and carry will reduce margin profitability, and expects the GPA food activities' EBITDA margin to stabilise around 5% (2014: 7.9%) over the next three years. This implies a mild recovery in Brazil's contribution to group FFO until 2019. Any further improvement relies on a stronger economic recovery and a continued appreciation of the real against the euro, which appear uncertain. Less Complex, Less Diversified A less complex group following the disposal of Big C Thailand (58.6% owned) in March 2016 is positive for Casino's financial profile, leading to less dividend leakage to minority interests. Fitch expects further simplification in 2017 through the successful sale of GPA's 43.4% stake in Via Varejo and the finalisation of Cnova's reorganisation. The positive impact of a less complex structure is offset by the negative impact of lower geographic diversification on Casino's business profile due to its exposure to high competition in a more limited number of countries. DERIVATION SUMMARY Casino's 'BBB-' rating is reasonably well positioned relative to peers on major comparators. A slightly weaker position in its main French market than the two market leaders' is partially compensated for by higher-than-average EBIT margins than other European food retailers. Its financial profile is more leveraged than its larger peers', but its material disposal programme is allowing the group to deleverage sustainably. Fitch calculates and monitors Casino's key financial metrics (adjusted FFO net leverage and FFO fixed charge cover) on a proportionally consolidated basis because its control and majority voting over its non-wholly owned subsidiaries mitigates its lack of direct access to their cash flows. No Country Ceiling or operating environment aspects affect the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for Casino (fully consolidated basis) include: - Decrease in reported sales in 2016 and 2017, mainly driven by the divestment programme and the strong negative FX impact from Latin American currencies. - Contraction of group EBITDA margin to 4.7% in 2016 from 5.1% in 2015, due to the disposal of higher-margin Asian operations and profitability deterioration in Latin America not compensated for by improvement in France. From 2017 slower EBITDA uplift in France, stabilisation in Latin America and growing e-commerce profits should drive a mild recovery towards 5.1% in 2018. - Capex down to around 3% of sales due to overall strong discipline across the group. - Continued disciplined financial policy. - Excluding interim dividend, neutral free cash flow generation in 2017 due to low FFO, turning positive (including at holding level and 100%-owned French entities) at around 0.6% of sales in 2018 on profitability improvement and lower interest payments. - Favourable impact of EUR4.3bn on consolidated net debt from Vietnam and Thailand disposals in 2016; disposal of GPA's stake in Via Varejo (including Cnova Brazil) in 2017. - Further reduction in Casino's holding company gross debt including scheduled repayment of EUR552m bond due 2017 and further bond buybacks RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to a Stable Outlook -Group EBIT margin consistently above 3.5%, reflecting sustainable turnaround in France and recovery in Brazil -Proportionally consolidated FFO fixed charge cover at or above 2.0x -Proportionally consolidated adjusted FFO net leverage below 4.0x on a sustainable basis -Maintenance of a reasonable convergence between proportionally consolidated and parent company's (including 100%-owned French entities) leverage metrics, reflecting adequate cash and debt match across the group. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Lack of meaningful improvement in both core French and group like-for-like revenue growth and profits, resulting in group EBIT margin below 3% on a sustained basis -Proportionally consolidated FFO fixed charge cover consistently below 2.0x -Proportionally consolidated adjusted FFO net leverage consistently above 4.0x -Evidence of further divergence between proportionally consolidated and parent company's (including 100%-owned French entities) leverage metrics, reflecting continuing important capital structure imbalances LIQUIDITY Adequate Liquidity Both the group and the parent (including 100%-owned entities) have a comfortable liquidity profile. At end-2015 the parent's short-term debt maturities of EUR1,211m were well covered by EUR3,244m available committed credit lines. Parent liquidity is further supported by the disposal of Big C Thailand and Vietnam completed in 2016. FULL LIST OF RATING ACTIONS Casino Guichard-Perrachon SA (Casino): Long-Term IDR: affirmed at 'BBB-'; Outlook revised to Negative from Stable Short-Term IDR: affirmed at 'F3' Senior unsecured: affirmed at 'BBB-'/'F3' EUR600m perpetual preferred constant maturity swap securities and EUR750m deeply subordinated fixed to reset rate (DS) notes: affirmed at 'BB' Casino Finance SA (Casino's fully owned financial subsidiary): Senior unsecured (debt guaranteed by Casino): affirmed at 'BBB-'/'F3' Contact: Principal Analyst Anne Porte Director +33 1 44 29 91 36 Supervisory Analyst Jean-Pierre Husband Director +44 20 3530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Summary of Financial Statement Adjustments - Leases: Fitch has adjusted end-2015 debt by applying a blended multiple of 6.2x of yearly operating lease expense related to long-term assets (EUR1,026m for 2015). The multiple varies according to country of operations and rent type (fixed against variable) in line with Fitch's methodology. - Cash: We have adjusted available cash at end-2015 to reflect restricted cash of EUR315m needed to fund intra-year working-capital needs or trapped in subsidiaries. In its calculations, Fitch has added back EUR129m of cash generated by the Big C Vietnam business. - Hybrid Debt: Fitch's debt calculation includes Casino's EUR600m hybrid securities (0% equity treatment under Fitch's hybrid methodology), 50% of Casino's EUR750m reset rate notes (50% equity credit under Fitch's hybrid methodology) - Adjusting Consolidated Profiles for Group Structures: Fitch calculates and monitors Casino's key financial metrics (adjusted FFO net leverage and FFO fixed charge cover) on a proportionally consolidated basis. - Other Adjustments: Fitch's 2015 adjusted debt calculation also includes theoretical market exposure related to the total return swaps on 3% of GPA's capital, 2.5% of Big C Thailand's capital, and various put options granted to owners of minority interests (EUR151m). Fitch also includes the debt related to Vietnam in its calculation. 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