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Fitch Places Picard BondCo on Rating Watch Negative on Dividend Recap
February 5, 2015 / 9:50 AM / 3 years ago

Fitch Places Picard BondCo on Rating Watch Negative on Dividend Recap

(The following statement was released by the rating agency) LONDON/PARIS, February 05 (Fitch) Fitch Ratings has placed Picard BondCo S.A.'s (Picard) Long-term Issuer Default Rating (IDR) of 'B+', as well as Picard Groupe S.A.S.'s senior secured floating-rate notes (FRNs) and revolving credit facility ratings of 'BB'/'RR2' on Rating Watch Negative (RWN). The rating action follows Picard management's announcement of an expected EUR602m dividend to be up-streamed from Picard. A further EUR19.4m dividend will be up-streamed from Picard PIKco, although this should not affect Picard's IDR. The dividend recapitalisation is to be financed with EUR19.4m additional PIK notes issued at Picard PIKco's level, a tap issue of the existing 2019 EUR480m senior secured FRNs to a total of EUR825m at Picard Groupe S.A.S's level, and an issue of EUR425m new 2020 senior notes at Picard's level. The existing 2018 EUR185m senior notes will be redeemed upon completion of the proposed transaction. Fitch has simultaneously assigned a 'CCC+(EXP)'/'RR6' rating to Picard's planned 2020 EUR425m senior notes. Following the completion of the transaction Fitch expects to assign a 'BB-'/'RR2' rating to the enlarged 2019 senior secured FRNs of EUR825m. The resolution of the rating watch and the final ratings are contingent upon the completion of the proposed transaction and the receipt of final documentation and structure conforming to information already received. The RWN reflects Picard's plan to upstream dividend to its sponsor Lion Capital, to be financed with an 88% net increase in Picard's debt. Post-transaction Fitch expects Picard's lease-adjusted funds from operations (FFO) net leverage to rise to 7.9x at FYE15 (financial year ending March 2015) from 5.2x at FYE14. Such re-leveraging would lead to a downgrade of Picard's IDR by at least one notch (maximum two notches, based on the information communicated to us to date) and lower Picard's debt instruments recovery prospects. These rating actions will reflect the sponsor's aggressive financial policy leading to higher leverage and refinancing risk, which will result in a financial profile more in line with 'B-' rated peers. The IDR, however, will remain underpinned by Picard's strong business profile and ability to generate sustained free cash flow (FCF). KEY RATING DRIVERS Aggressive Sponsor, Refinancing Risk Following the planned transaction Fitch expects lease-adjusted FFO net leverage to increase to 7.9x in FY15. This is a key constraint on the rating, and explains the RWN today. Based on historical performance and Fitch's forecasts, we consider that the group's deleveraging pace should not be significantly affected by the new capital structure; leverage should reduce by 1.1x-1.2x by FYE18 under both the current and new debt structure. However, Fitch views the sponsor's financial policy, which demonstrates low equity involvement, as aggressive. Under the proposed capital structure, Fitch expects Picard's lease-adjusted FFO net leverage to remain above 6.5x at FYE18. Resilient Business Model Picard BondCo's like-for-like sales started to recover in 4Q FY14 and grew 0.8% in 1H FY15. Fitch expects some acceleration over the next three years albeit with annual growth remaining lower than pre-2008. This is due to growing competition among food retailers to increase customer traffic through more attractive store formats and selling prices. Low Execution Risk in Strategy Fitch believes management's expansion strategy, which now includes development through franchises, has a low execution risk. Picard's franchises would contribute less to revenues and EBITDA than owned stores. However, they do not represent significant risk as the establishment cost will be low for Picard, and if the franchises are not successful, the related loss will not be significant either. Fitch, however, notes that the growing inclusion of franchises in the group's business model slightly increases the exposure to potential food scares as the group has de facto less control on franchises' operations than on own stores. Operating Margin Pressure Fitch expects Picard's EBITDA margin to stabilise at around 13.5% in the next four years following the FY11 peak of 14.6% (FY14:13.4%). The limited sales recovery from FY14 reflects expansion-related costs and our expectation of consistently high marketing costs due to continued competitive pressure. A growing cost base, although under control, should be only partially offset by subdued like-for-like sales growth. Slow Geographic Diversification Picard's unproven ability at diversifying its activities geographically is a rating constraint. While we acknowledge Picard's expansion opportunities in the long-term, we factor in limited contribution to the overall group sales and profits within the next five years. However we expect moderate execution risks in entering new markets initially via either concessions-in-shops (Japan) or franchises (Switzerland). Furthermore Fitch takes a positive view of management's cautious approach to foreign expansion as we believe a slowdown in owned-store openings would not significantly affect the group's cash flow prospects under the new debt structure. Lower but Still Strong FCF Under the proposed capital structure we expect FCF generation capacity to be slightly lower than under the current one, primarily due to higher interest costs. We forecast higher interest costs will be only partially compensated by the EBITDA uplift from new franchises requiring no capex. Low cash flow volatility continues to reflect the group's resilient gross profit margin and its flexibility to scale back expansion capex without eroding EBITDA and FFO generation. Such solid cash flow generation capacity in turn provides adequate financial flexibility and liquidity to the group's operations. Weak Expected Recoveries for Senior Notes Under the new capital structure, the senior secured FRNs and RCF ratings indicate above- average expected recoveries in the range of 71%-90%. The recovery expectations are driven by a post-restructuring EBITDA around 30% below the group's adjusted LTM September 2014 EBITDA of EUR182m, combined with an estimated going concern enterprise value/EBITDA multiple of 6.0x. In view of the payment waterfall Picard's new senior notes' ratings of 'CCC+(EXP)'/'RR6' reflect weak recovery prospects in case of default. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating action include: - Positive like-for-like sales growth, combined with successful and profitable regional expansion, translating into a resilient profit margin and FCF generation above 5% of sales (5.2% in FY14) - FFO adjusted gross leverage sustainably below 5.0x (4.0x net of readily available cash) - FFO fixed charge cover sustainably above 2.5x (FY14: 1.9x) Negative: Future developments that could lead to negative rating action include: - Significant deterioration in like-for-like sales and EBITDA margin - FFO fixed charge cover below 1.7x - FFO adjusted gross leverage sustainably above 6.0x (5.5x on a net basis) - Refinancing of Picard PIKCo S.A.'s PIK notes through a debt instrument with terms and conditions that may place the FRNs and senior note holders in a less favourable position Contact: Primary Analyst Anne Porte Associate director +33 144 29 91 36 Supervisory Analyst Jean-Pierre Husband Director Fitch Ratings Limited 30 North Colonnade London E14 5GN +44 20 3530 1155 Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014 and 'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' dated 18 November 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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