June 3, 2014 / 3:17 PM / 3 years ago

Fitch Places Elior on Rating Watch Positive

(The following statement was released by the rating agency) LONDON, June 03 (Fitch) Fitch Ratings has placed French-based foodservices company Elior SA (Elior) (previously Holding Bercy Investissement SCA) ratings on Rating Watch Positive (RWP). The ratings being placed on RWP are Elior's Issuer Default Rating (IDR) of 'B+' and its senior secured credit facility of 'BB-', and Elior Finance & Co. SCA's 'BB-'/'RR3' EUR350m senior secured notes due 2020. The RWP reflects the recent announcement of a EUR845m initial public offering (IPO) by the group, which will initially be used to repay secured bank and bond debt. Post IPO Fitch expects funds from operations (FFO) Fitch-adjusted gross leverage to reduce to around 5.2x on a pro-forma basis from 7.6x at the financial year ended September 2013 and to remain at or below 5.0x thereafter. On the basis that the IPO is successful this could be consistent with a higher rating if the guidelines detailed below for an upgrade are met. In the event that the IPO is completed but the de-leveraging path or profits are not in line with expectations Fitch could assign the IDR a Positive Outlook reflecting the diversification of the group's funding sources and better financial flexibility resulting from the IPO. The ratings continue to reflect Elior's balanced business profile resulting from its broad product offering, strong customer and business diversification, and high barriers to entry in the catering sector. KEY RATING DRIVERS Reducing but High Leverage The IPO of EUR845m (EUR785m of new shares and EUR60m of existing shares) should reduce FFO adjusted gross leverage to a pro-forma 5.2x from 7.6x at FYE13. Fitch expects credit metrics to show additional improvement by September 2015, driven by moderate organic sales growth and mild profit margin expansion as extraordinary costs dissipate. Thereafter, any meaningful deleveraging will be predicated on continued profit growth and Fitch does not expect any further material repayment of debt prior to bullet maturities in 2019/2020. Strong Cash Flow Conversion The asset-light nature and low capital intensity of the business allow Elior to convert operating profits into positive cash flow before debt service; Fitch estimates free cash flow (FCF) margin averaging 1% of sales over the next four years. This provides some financial flexibility, a key supporting factor of the company's credit profile. However, FFO fixed charge cover is expected to at 2.4x by September 2015 (around 2.0x pre-IPO), which is weak for the potentially higher rating, but adequate for the existing rating. Sound Business Risk Profile Elior's geographical concentration in France and other southern European countries remains a constraining factor on the rating relative to its closest peers Compass (A-/Stable) and Sodexo (BBB+/Stable), who maintain broader geographical diversification. Nonetheless, Elior possesses several company-specific traits akin to low investment grade business services companies such as a broad range of services and customer diversification as well as a high proportion of contracted revenues and low renewal risk. Long-Term Outsourcing Trend The long-term trend toward outsourced foodservices is expected to support continued sales and profit growth over the medium term. Diversified Profit Drivers Elior's contract catering and support services segment (representing 68% of FY13 group EBITDA) is a key anchor of the ratings. We expect profitability under these contracts, which is largely P&L based (ie where the provider is paid for the service and bears the costs), to remain steady in a low inflationary environment while retaining any productivity improvements. We also expect concession activities, accounting for one-third of group EBITDA, to remain structurally more profitable, albeit more capital-intensive, than contract catering over the next two years. Adequate Liquidity Unrestricted cash of EUR231m at end-March 2014 (EUR210m at FYE13), together with access to nearly EUR200m of undrawn revolving credit facilities pre-IPO, is sufficient to meet Elior's business needs and moderate debt repayments for 2014 and 2015 of around EUR300m. RATING SENSITIVITIES Positive: Future developments that could, individually or collectively, lead to positive rating actions include: - Further deleveraging resulting from the application of a significant portion of IPO proceeds to debt redemption so that FFO adjusted gross leverage is below 5.0x - FFO fixed charge coverage sustained above 2.8x (FYE13: 1.7x) - FCF/total adjusted debt margin above 12% Negative: The ratings are likely to be affirmed with a Stable Outlook if the planned IPO fails to materialise or if future credit metrics are worse than expected. Contact: Principal Analyst Bryant Bedwell Associate Director +44 20 3530 1581 Supervisory Analyst Jean-Pierre Husband Director +44 20 3530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair 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, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage 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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