For the first quarter of 2012, Rexel reported operating sales of EUR3.2 billion, an improvement of 7.4% compared with the same period in the previous year. We note that sales growth was, in effect, in the low-single digits absent of acquisitions, currency benefits, and extra sales days in the first quarter. In our view, this is largely related to the group's sales price increases, rather than underlying volume growth. The group recorded an improvement of 9.4% in its EBITDA. During the first-quarter of 2012, Rexel reported a negative impact of 1.1% on organic same-day sales related to a decline in copper prices.
S&P base-case cash flow and capital-structure scenario
We believe the group's credit metrics will remain commensurate with the current rating, including funds from operations (FFO) to debt of about 20% (the rolling 12-months FFO-to-debt ratio was about 21% at the end of the first quarter of 2012 and 21.7% at year end 2011).
In our view, Rexel can maintain these credit metrics despite an anticipated pick-up in acquisition activity and moderate shareholder returns. Management has indicated that it has a spending capacity of EUR400 million for acquisitions if the right targets materialize.
Rexel's shareholder structure largely consists of private equity investors, with approximately 60% of shares owned by Ray Investment S.a.r.l. (not rated), an investment consortium (formed of Clayton, Dubilier & Rice, Eurazeo, and BAML Capital Partners); 24.8% of shares are publicly traded. We note that Rexel's shareholder structure is expected to change, as the current private equity investors have been invested in the group for over six years. Nevertheless, we believe that both management and shareholders remain focused on ongoing deleveraging, while at the same time, seeking to grow the business organically and through bolt-on acquisitions. We therefore do not anticipate any aggressive step-ups in the shareholder payout policy that could result in credit measures falling below the levels commensurate with the current rating.
Rexel recently issued $500 million in bonds in 2012 at 6.1% maturing in December 2019.
We view Rexel's liquidity as "strong" under our criteria. The group has access to EUR1.07 billion of currently undrawn committed credit, and cash equivalents of EUR623.8 million at the end of March 2012 (of which EUR229.11 million is held in subsidiaries). Furthermore, we believe that Rexel will continue to generate robust operating cash flow. We believe that these sources will comfortably cover (by 1.7x or more over the next 24 months) uses consisting of:
-- EUR491.7 million in near-term debt maturities (of which EUR141.8 million relates to commercial paper maturities) including accrued interest, due within one year, and EUR312 million due within two years;
-- Moderate capital expenditures of about 0.5% of sales (EUR15.1 million for the first-quarter of 2012--about EUR60 million per year); and
-- Some acquisition activity.
-- We believe that about EUR100 million of cash will be needed to fund ongoing operations.
Rexel's credit lines are subject to maintenance financial covenants, which we believe the company will continue to meet with sufficient headroom.
The issue rating on the cumulative EUR1.3 billion revolving credit facilities (RCFs) issued by Rexel is 'BB', in line with the corporate credit rating. The recovery rating on these facilities is '4', indicating our expectation of average (30%-50%) recovery for creditors in the event of a payment default.
The issue ratings on Rexel's EUR650 million, EUR500 million, and recent $500 million senior unsecured notes are 'BB.' The recovery rating on these notes is '4', indicating our expectation of average (30%-50%) recovery in the event of a payment default.
The EUR1.3 billion RCFs are split into EUR200 million of facility A due December 2012 and EUR1.1 billion of facility B due December 2014. These loans are unsecured and rank pari passu with the EUR650 million notes due 2016, the EUR500 million notes due 2018, and the $500 million notes due 2019, to which they have a similar guarantee package, with the guarantors contributing 80% of EBITDA, 68% of assets, and 68% of sales.
We value the business on a going-concern basis because we believe that Rexel's "satisfactory" business risk profile, along with the cash-generative nature of its business, would result in it being sold off as a going concern on the path to default. In our view, along with general economic pressures, continually reduced demand, and thin distribution margins, the business could face further operational difficulties in implementing its centralization plan, leading to a hypothetical default in 2014. In our hypothetical default scenario, we consider that the refinancing of the larger facility B revolver that is due in 2014 could trigger a default by 2014.
Under our hypothetical default scenario, we estimate the stressed enterprise value at approximately EUR1.2 billion, after deducting existing debt outstanding under the securitization program, which we treat as a priority claim. This value is also supported using a discrete asset valuation methodology, assuming no value to noteholders from the receivables book. The value mainly flows from inventories and fixed assets.
After deducting priority obligations, which include enforcement costs, 50% of pension liabilities, and existing debt outstanding under the securitization program, we expect coverage of 30%-50% for the RCFs, the EUR650 million notes, the EUR500 million notes, and the $500 million notes, corresponding to a recovery rating of '4'.
However, if Rexel granted security to the RCFs as a condition for a maturity extension or a covenant waiver prior to our simulated default in 2014, we believe that recovery prospects for the unsecured noteholders could weaken materially.
The stable outlook reflects our opinion that Rexel will maintain its ability to generate sound cash flow from operations and a willingness to use part of its discretionary cash flow to deleverage further. This, in turn, should result in credit metrics commensurate with the current ratings, such as FFO to debt of about 20%. We believe that Rexel could maintain its credit metrics at such levels, despite a return to moderate acquisition activity and moderate dividend payouts. This is provided Rexel does not undertake large debt-funded acquisitions or adopt a more aggressive financial policy, which may be dictated by a potential change in ownership.
Rating upside is conditional on the sustainability of credit measures commensurate with a 'BB+' rating--for instance, FFO to debt of about 25%. This could arise should Rexel prioritize debt reduction over external growth and shareholder returns in the absence of severe market disruption. Rating upside is also conditional on our assessment that the group's financial strategy and shareholder policies could be accommodated at a higher rating.
Rating downside could be fueled by significantly weaker end-market conditions than we currently anticipate, with the EBITDA margin returning to the low 2009 level of 4%, and/or more aggressive debt-funded spending activity that utilizes the headroom at the current rating.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Key Credit Factors: Business And Financial Risks In The Global Building Products And Materials Industry, Nov. 19, 2008
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008