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Fitch Upgrades Picard BondCo's Senior Notes to 'BB', Affirms IDR at 'B+'
November 20, 2014 / 1:32 PM / 3 years ago

Fitch Upgrades Picard BondCo's Senior Notes to 'BB', Affirms IDR at 'B+'

(The following statement was released by the rating agency) LONDON, November 20 (Fitch) Fitch Ratings has upgraded Picard BondCo SA's (Picard) senior notes to 'BB' with a Recovery Rating of 'RR2' from 'BB-'/'RR3'. Fitch has also affirmed Picard's Long-term Issuer Default Rating (IDR) at 'B+' with a Stable Outlook and Picard Groupe SAS's EUR480m floating rate notes (FRNs) and revolving credit facility (RCF) at 'BB'/'RR2'. The upgrade of the senior notes follows their partial prepayment of EUR115m out of EUR300m on 29 October 2014. According to the payment waterfall, this repayment mechanically increases the recovery prospects of the remaining EUR185m senior notes. The affirmation of the IDR is supported by Picard's strong business model, which demonstrates its resilience, in terms of EBITDA and free cash flow (FCF) generation, in a long-lasting weak consumer environment. The EUR115m debt prepayments clearly improve the company's financial flexibility and pace of deleveraging. It also somewhat alleviates the risk represented by the effective timing subordination of the FRNs (maturing in August 2019) to the senior notes (October 2018) and Picard PIKCo PIK notes (maturing in June 2019). Nevertheless, these repayments are not sufficient to trigger a positive rating action on the IDR. In Fitch's view, this would require a structural improvement in operating performance leading to higher FCF generation and consistently lower leverage. This could be supported by a successful regional expansion, translating into a higher profitability and in turn, stronger funds from operation (FFO) generation. The current market environment in France and the cautious pace of Picard's network roll-out abroad, which we reflect in our forecasts, do not point in this direction. KEY RATING DRIVERS Senior Notes Upgrade The recovery expectations assume a post-restructuring EBITDA approximately 25% below the group's Fitch-adjusted FY14 EBITDA of EUR178m, combined with an estimated going concern multiple of 6x enterprise value/EBITDA. The smaller size of the senior notes following their partial prepayment mechanically increases their recovery prospects. Despite being subordinated to the FRNs and the RCF (which we assume fully drawn in a distressed situation), they now reach maximum value under Fitch's assumptions. However, as most of the borrowing group's assets are located in France, the outstanding senior notes recovery rating is capped at 'RR2' (71%-90% range). Resilient Business Model Picard Bondco's like-for-like sales started to recover in 4Q FY14 (fiscal year ending 31 March 2014). Fitch expects further growth, albeit at a slower rate than pre-2008 due to increasing competition. In particular, Fitch believes the gradual shift by consumers to cheaper products, resulting in declining average individual basket value over the past few years, is now exacerbated by the heavy price cuts initiated by major food retailers. Long-term Margin Pressure Fitch expects Picard's EBITDA margin to stabilise at around 13%, down from the FY11 peak of 14.6%. The group still benefits from high profitability relative to rated food retail peers, thanks to its specific business model (partial vertical integration, products sold under own brand, higher-end price positioning). Marketing costs should remain high, due to growing competitive pressure and consumer scrutiny on product quality. In addition, expansion-related costs will continue to weigh on profitability over the next three years. Slow Geographic Diversification Although the initial results of expansion in Belgium and Sweden are encouraging, growth prospects are uncertain. Picard's unproven ability at diversifying its activities geographically acts as a rating constraint. However, Fitch views positively management's cautious approach to expansion. A slowdown in roll-out would not affect cash flow prospects under the current debt structure. Solid Free Cash Flow Fitch expects Picard's annual FCF to average 4.6% of sales over the next three years. The group benefits from a high cash conversion ratio, due to limited working capital swings and moderate capex relative to EBITDA. Interest savings from the early repayment of EUR115m senior notes frees cash of approximately EUR10m per annum, improving our average FCF generation prospects by 60bp as a percentage of sales. Low cash flow volatility reflects the group's resilient gross profit margin and its flexibility to scale back expansion capex without eroding EBITDA and FFO generation. Steady but Slow Deleveraging Despite prospects of relatively flat FFO and higher operating leases, thanks to the senior notes partial prepayment (0.4x positive effect on leverage) Fitch now expects lease-adjusted FFO gross leverage to decrease to 5.4x in FY15, versus an increase to 5.9x expected earlier. However, Fitch does not expect Picard's gross leverage to fall below 5.0x over the next four years (net below 4.0x) due to a lack of FFO uplift, linked to the company's limited growth prospects in France and the limited amount of FFO we expect the group to be able to generate abroad over the period. 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. - 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 PICKCo S.A.'s PIK notes through a debt instrument with terms and conditions that may place the FRN and senior noteholders in a less favourable position. Contact: Principal Analyst Anne Porte Associate Director +33 44 29 91 36 Supervisory Analyst Jean-Pierre Husband Director +44 20 3530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Giulio Lombardi Senior Director +39 02 8790 87214 Media Relations: 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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