Reuters logo
Fitch Affirms Metro AG at 'BBB-'/Negative; Withdraws Ratings
December 5, 2016 / 4:21 PM / 9 months ago

Fitch Affirms Metro AG at 'BBB-'/Negative; Withdraws Ratings

(The following statement was released by the rating agency) LONDON, December 05 (Fitch) Fitch Ratings has affirmed Metro AG's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. Fitch has also affirmed the unsecured rating of the notes issued by Metro Finance BV (guaranteed by Metro AG) at 'BBB-'. The Outlook is Negative. At the same time Fitch has chosen to withdraw the ratings of Metro for commercial reasons. Accordingly, Fitch will no longer provide public ratings or analytical coverage for Metro. Metro's 'BBB-' IDR remains underpinned by its scale, and by its business and geographic diversification. Its now completed asset disposals plan has brought enough liquidity to fund the investments to upgrade its business model to FY18. We also expect profits to have stabilised in the financial year ending September 2016 (FY16). However, Metro remains half-way through its turnaround plan. Returns on investments are uncertain in a sector undergoing unprecedented structural changes. In this context, the uncertainty around Metro's ability to enhance its profitability compromises any substantial improvement in its currently weak financial profile; therefore the Outlook remains Negative ahead of the planned spin-off of its cash & carry and Real hypermarkets, completion of which is aimed by mid-2017. KEY RATING DRIVERS Fragile Sales Momentum Fitch expects Metro's like-for-like sales growth to slow down to +0.2% in FY16 after the recovery in FY15 (+1.5%), and to remain at around +1% per year over the next three years. This reflects continuing high price pressure in the food retail market. It also highlights Metro's challenges at making its offer attractive in a retail environment where differentiation is key and where customer requirements can quickly evolve. Operating Margins Stabilise Fitch expects Metro's EBIT margin will have bottomed out at 2.2% in FY16 (FY15: 2.3%) but believes a meaningful uplift remains elusive in the medium term. From FY16 the group's strong cost-cutting measures, including the closure of loss-making stores, should fully offset expensive operational investments in repositioning. Furthermore, Fitch expects reducing trading headwinds from Russia, where sales are now showing signs of stabilisation and even some mild growth. The continuing appreciation of the rouble against the euro, which began in January 2016, could also play a positive role from next year leading to enhanced profit translation into euros. Uncertain Profit Prospects Improved profitability will depend on management's ability to generate sufficient top-line growth to gain operating leverage on its cost base. Management will have to compensate for a growing share of lower-margin online sales with higher added value elsewhere, which is a difficult combination to achieve given unpredictable consumer behaviour. Fitch takes into account these challenges by conservatively assuming only mild EBIT margin improvement to 2.5% in FY18. Spin-off in Progress Metro is currently in the process of splitting its Wholesale and Retail Food businesses, METRO Cash & Carry and Real, from its consumer electronics division Media-Markt Saturn. The split and public listing of both entities are planned for mid-2017. Our rating and Outlook do not factor in the future capital structure of both sides of the business post spin-off. Meanwhile the disposals of Galeria Kaufhof in September 2015 and Cash & Carry Vietnam in March 2016 have considerably improved the group's financial flexibility, with funds from operations (FFO) adjusted net leverage decreasing by one turn down to 4.2x at FYE15 and FFO fixed charge coverage projected to stay in the 1.8x-2.0x range. Negative Free Cash Flow Fitch projects METRO's post-dividend free cash flow (FCF) will remain negative over FY16-FY18 as the group pursues a high level of investments to support the turnaround of its operations. Nevertheless, we expect Metro's high capex to be mitigated by a significant improvement in the group's EBITDAR to FFO conversion ratio, due to lower debt costs and permanently reducing restructuring costs. This should help preserve adequate financial flexibility, with average annual cash outflows limited to 1% of sales. Low Deleveraging Capacity After significant proceeds from asset sales which drove it down to 4.2x at FYE15 from a high 5.2x at FYE14, Fitch forecasts Metro's FFO adjusted net leverage should remain stable at around 4.4x-4.5x over FY16-FY18 which is rather weak for its 'BBB-' rating. This reflects Fitch's view that the group's deleveraging capacity will remain muted as far as its change in business model will have not yet proven successful in generating a steady improvement in profitability and FCF generation. DERIVATION SUMMARY Metro AG is more weakly positioned within the sector than competitors such as Carrefour (BBB+/Stable), Tesco (BB+/Stable) and Casino Guichard Perrachon SA (BBB-/Stable). While benefiting from wider product diversification and a cash generative "cash and carry" format, its business model is still challenged and it was one of the last food retail groups to begin a transformation process in line with changing customer requirements. Its financial profile is also weak with leverage high for a 'BBB-' rated food retailer and low de-leveraging prospects. No Country Ceiling, parent/subsidiary or operating environment aspects impact the rating. KEY ASSUMPTIONS Not applicable RATING SENSITIVITIES Not applicable LIQUIDITY Not applicable 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: peter.fitzpatrick@fitchratings.com. Summary of Financial Statement Adjustments - - Leases: Fitch has adjusted the debt by adding 8x of yearly operating lease expense related to long-term assets (EUR1,383m for FY15). - EBIT: Fitch's EBIT is calculated by excluding gains and losses from asset sales, goodwill impairment and net gains from reversal of goodwill impairment from METRO'S reported "EBIT before special items". -Readily available cash: Fitch includes Metro's EUR424m financial investments as readily available cash due to their high liquidity profile. 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 Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1015885 Solicitation Status here Endorsement Policy 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 WEB SITE AT 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. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below