April 9 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Holding Bercy Investissement SCA a Long-term Issuer Default Rating (IDR) of 'B+' with a Stable Outlook. Holding Bercy Investissement SCA is the holding company of France-based contract foodservices and concession catering operator Elior Group (Elior). Fitch has also assigned the company's existing EUR2.0bn senior secured credit facility a 'BB-'/'RR3' rating.
Balanced and Resilient Business Profile
Elior's large scale, broad product offering, strong customer and business diversification, and high barriers to entry have resulted in consistent performance through the economic cycle. The company has a balanced presence in each sub-market it competes in, both in contract catering and concession catering, and is benefiting from a long-term secular trend toward outsourced foodservices. These factors, combined with the company's high retention rate, strong reputation and expertise, are expected to support continued sales and profit growth over the intermediate term.
Position Relative to Peers
Elior possesses several company-specific traits akin to low investment grade for business services companies such as a broad range of services and customer diversification as well as a high proportion of contracted revenues and low renewal risk. However the main constraining factor on the rating is Elior's geographical concentration in France and other southern European countries, relative to its closest peers Compass ('A-'/Stable) and Sodexo ('BBB+'/Stable).
Strong Cash Flow Conversion
The asset-light nature and low capital intensity of the business allows Elior to consistently convert operating profits into strong cash flow before debt service. Given the high prevailing leverage, this aspect is viewed as critical to providing financial flexibility and supporting the overall credit profile of the company. From a business risk standpoint, Fitch considers Elior has a profile in line with a 'BB' rating. However, the company's financial profile is more in line with a 'B' rated issuer, thus bringing the rating to 'B+'.
Weak Metrics, Expected Improvement
While the business has shown strong growth over the past several years, the company relevered in 2012 to execute a share buyback and, as a result, has only achieved modest credit metric improvement since the LBO in 2006. FFO adjusted leverage increased to almost 8.0x in FY12 from under 6.2x at FY11 while FFO fixed charge cover declined to below 2.0x from above 2.2x the prior year. While Fitch expects the capital structure to remain highly levered over the intermediate term, Elior's credit metrics are projected to show near-term improvement as recent acquisitions are fully integrated and Elior benefits from lower taxation resulting from the French CICE staff cost rebate scheme in FY13. FFO adjusted leverage is projected to decrease to around 6.8x while FFO fixed charge cover is expected to increase to around 2.0x. These credit ratios will be more compatible with the assigned IDR.
Elior also completed an "amend and extend" of its current capital structure in April 2012 that pushed the maturity of its RCF to June 2016 and extended the maturity on most of the term loans to June 2017. As such, liquidity and refinancing are not a material rating concern at present. In our view, the company is projected to have sufficient cash and borrowing capacity to repay or refinance near-term maturities.
Expected Recovery for Creditors upon Default
Elior's Recovery Ratings reflect Fitch's expectations that the enterprise value of the company - and resulting recoveries for its creditors upon default - would be maximised in a restructuring scenario (going concern approach), rather than a liquidation due to the asset-light nature of the business. Fitch believes a 6.0x distressed EV/EBITDA multiple and 25% discount to EBITDA resulting from unsustainable financial leverage, possibly as a result of increasingly aggressive acquisition activity or contract losses, are fair assumptions under a distress scenario. This results in above-average expected recoveries (51%-70%) for first lien creditors in the event of default and hence a rating for the senior secured bank debt at 'BB-' one notch above Elior's IDR. Recoveries are supported by share pledges and guarantees representing at least 85% of the group's EBITDA and gross assets.
Positive: Future developments that could lead to positive rating actions include:
- Additional diversification, by segment and/or geography
- Further deleveraging resulting in FFO adjusted gross leverage below 5.0x
- FFO fixed charge coverage above 2.8x
- FCF/total adjusted debt margin above 12%
Negative: Future developments that could lead to negative rating action include:
- FFO adjusted gross leverage above 7.0x
- FFO fixed charge coverage below 2.0x
- FCF/total adjusted debt margin below 5%