(The following statement was released by the rating agency)
March 20 -
Summary analysis -- Casino Guichard - Perrachon & Cie S.A. -------- 20-Mar-2012
CREDIT RATING: BBB-/Stable/A-3 Country: France
Primary SIC: Grocery stores
Mult. CUSIP6: 14758Q
Credit Rating History:
Local currency Foreign currency
03-Nov-2005 BBB-/A-3 BBB-/A-3
04-May-2005 BBB/A-3 BBB/A-3
The ratings on France-based food retailer Casino Guichard - Perrachon & Cie S.A. (Casino) reflect Standard & Poor's Ratings Services' view of the group's "strong" business risk profile, as one of the leading French retailers, and its "significant" financial risk profile.
Casino's business risk profile is underpinned by the group's solid position in its home market, with a focus on the convenience and discount segments, and its above-average growth prospects stemming from its substantial exposure to Latin America and Southeast Asia. The declining performances of its French hypermarkets partly mitigate these strengths.
Our view of Casino's financial risk profile takes into account its limited capacity to generate positive free cash flow and its ownership by the leveraged holding company Rallye, which constrains the dividend policy. While upcoming changes in consolidation scope may have positive effects on Casino's credit quality, they also entail significant execution risks that add to the group's already elevated financial complexity.
S&P base-case operating scenario
We anticipate that changes in consolidation scope will primarily drive 2012 financial metrics. We understand from management that Casino intends to fully consolidate its 40.1% stake in Brazilian retailer GPA next June. Casino has also announced plans to reduce its stake in its fully consolidated real estate subsidiary Mercialys from 50.1% to the 30%-40% range, and then account for it under the equity method. In our opinion, Casino's loss of majority voting rights at Mercialys will have no impact on our assessment of the business risk profile because this subsidiary primarily manages shopping centers and not store premises.
At constant consolidation scope, our base-case scenario assumes that international operations (45% of 2011 revenues) will fuel Casino's 2012 performances. We believe international units will post mid-to-high revenue growth on a like-for-like basis and stabilize their profitability. We foresee that French operations (excluding Mercialys) will roughly maintain their reported EBIT generation at about EUR600 million, as increasing trading space should offset moderate margin erosion.
S&P base-case cash flow and capital-structure scenario
Based on our preliminary calculations, our year-end 2011 credit metrics for Casino are weaker than what we consider commensurate with the current ratings, namely ratios of funds from operations (FFO) to debt of 25% and debt to EBITDA of up to 3.0x. However, we anticipate that the EUR1 billion in proceeds from the divestment of Mercialys shares and Thailand-based subsidiary Big C's capital increase will strengthen Casino's financial position. We also believe that Casino will use the cash located at international subsidiaries to repay local debt, meaning that it will qualify as surplus cash under our methodology.
If Casino fully consolidates its Brazilian subsidiary Companhia Brasileira de Distribuicao (CBD; Brazil national scale brAA-/Stable/--) in 2012, we could adjust our credit ratio thresholds to better reflect the increased financial complexity caused by larger minority holdings and limited cash flow circulation within the consolidated group. More generally, we consider that our assessment of Casino's financial risk profile is based on the assumption that management would offset any shortfall in financial metrics and increasing group structure complexity with nonoperating sources of cash.
In our opinion, the probability of a purchase of Galeries Lafayette's stake in Casino's partly owned subsidiary Monoprix, has increased. Still, we do not include in our adjusted debt calculation the value of the put option sold by Casino since we believe that an acquisition of the remaining 50% would not be entirely debt-financed. We will assess the risks associated with such a transaction and its potential effects on credit ratios if it materializes.
The short-term credit rating is 'A-3'. We view Casino's liquidity as "adequate," according to our criteria. Our view of the group's liquidity is supported by our estimate that liquidity sources will exceed funding needs by more than 1.2x in the next 12 months.
On Dec. 31, 2011, we assess liquidity sources at approximately EUR8.1 billion, including:
-- EUR3.8 billion of cash and cash equivalents (net of the amount used in cash registers);
-- EUR2.2 billion of undrawn credit facilities, of which EUR1.2 billion matures in 2015;
-- About EUR1.4 billion of unadjusted FFO generated over the next 12 months (based on proportional consolidation of GPA);
-- EUR0.1 billion of secured asset sales; and
-- EUR0.6 billion of proceeds from a bond issuance in March 2012.
We estimate Casino's liquidity needs in the next 12 months to be about EUR4.7 billion, comprising:
-- EUR2.1 billion of short-term debt;
-- About EUR0.9 billion of seasonal fluctuation in working capital;
-- About EUR1.2 billion of capex; and
-- About EUR0.4 billion of dividends.
The stable outlook reflects our view that Casino has the willingness and ability to maintain a financial risk profile commensurate with the current rating, despite the uncertainties linked to the likely changes in Casino's consolidation scope. In particular, we believe that Casino will be able to successfully execute asset disposals and Big C's capital increase in a timely fashion. We also factor in our assumption that potentially weakening credit ratios and an increasing complexity in the group's corporate structure would be offset by management's initiatives to support the financial risk profile.
We could lower the ratings if Casino were unable to post FFO to debt above 25% and debt to EBITDA below 3.0x. Such a possibility would arise in the event of marked operating underperformance or if the company is unable to complete the abovementioned transactions. Negative rating pressure would also build if we perceived a pronounced increase in execution risks or financial complexity.
Ratings upside is remote at this stage, in our view, owing to the group's increasingly complex corporate and financial structure and limited visibility in its core French retail market.
Related Criteria And Research
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business And Financial Risks In The Retail Industry, Sept. 18, 2008