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Fitch Removes Lion/Seneca France 2 from Rating Watch Positive; Affirms at 'B'
April 25, 2017 / 10:06 AM / 7 months ago

Fitch Removes Lion/Seneca France 2 from Rating Watch Positive; Affirms at 'B'

(The following statement was released by the rating agency) LONDON, April 25 (Fitch) Fitch Ratings has removed the Long-Term Issuer Default Rating (IDR) of France-based optical retailer Lion/Seneca France 2 S.A.S. (Afflelou) from Rating Watch Positive (RWP) and affirmed the IDR at 'B'. The Outlook is Stable. Fitch has also affirmed 3AB Optique Developpement S.A.S.'s EUR365 million senior secured notes due 2019 and super senior Revolving Credit Facility (RCF) ratings at 'BB-'/RR2 and Lion/Seneca France 2 S.A.S.'s EUR75 million senior notes due 2019 rating at 'CCC+'/RR6. The removal of the Long-Term IDR from RWP follows the company's decision to put on hold its IPO and refinancing plans. At the same time, strong network performance and the prospects of stable and improving cash flow generation, along with a slight improvement of the leverage metrics until notes' maturity in two years support the IDR affirmation at 'B' with a Stable Outlook. KEY RATING DRIVERS IPO Plans Put on Hold Fitch has removed the IDR from RWP following Afflelou's decision to put on hold an IPO and debt refinancing in 2016/2017. We understand that the company is evaluating various options, ranging from debt refinancing to exit by the sponsor, and may return to the bond holders with a new full or partial redemption proposal, particularly as the non-call period for the existing notes expires in October 2017. Stable Operating Performance Afflelou's strong interim results and ongoing business development initiatives, such as store network expansion, selective add-on acquisitions into online retail, foreign networks and hearing aids, back our expectations of stable performance in FY17-18. Cooperation with major national care networks is beginning to bear fruit, which is reflected in higher network activity and increased earnings. Such operating developments reflect a successful implementation of the business strategy and adaptation of the company to the evolving trading environment. Strong Cash Flow Generation Fitch projects Afflelou will generate consistently positive free cash flows with mid-to-high single-digit FCF margins. This assumption is supported by steadily expanding EBITDA, which is driven by higher network activity. In addition, Afflelou's efforts to reduce the number of directly-owned stores through sale or closure should relieve cash flows and credit metrics, underpinning the asset-light nature of Afflelou's business model as a franchisor model. Small-scale acquisitions are embedded in the current ratings, as they can be comfortably funded by internal cash. Leverage High, But Adequate Fitch projects tight leverage headroom in FY17, with FFO adjusted leverage only marginally below 7.0x, improving towards 6.5x during FY19 when the notes become due. In the absence of scheduled amortisations and slow anticipated earnings growth, we see no material deleveraging over the rating horizon, and in fact since the notes' issuance in 2014. At the same time, we view such a financial risk profile as adequate for the assigned IDR of 'B' given Afflelou's cash-generative business model. Refinancing Poses Little Risk Refinancing considerations will weigh more on the rating as the notes approach maturity in April 2019. At the same time, Fitch does not consider refinancing to carry a high execution risk given Afflelou's positive track record with the public debt markets and the familiarity of the investors with the business model. Thus, in our base case projections we assume that Afflelou will be able to refinance maturing notes in a timely manner at least on the same terms. DERIVATION SUMMARY Afflelou's Long-Term IDR of 'B'/Stable reflects a symbiotic business model with healthcare and retail components. The business benefits from the favourable reimbursement policy for eyecare in France. This provides for greater operational stability compared with conventional retailers, who face less predictable consumer behavior, and as a result, are exposed to higher sales and earnings uncertainties. Consequently, Afflelou's operational resilience tolerates a slightly higher degree of financial risk, or one notch above its pure retail peers such as Mobilux 2 SAS (B/Stable), New Look Retail Group Ltd (B-/Stable) and Financiere IKKS S.A.S. (CCC). When compared to the healthcare peers Synlab Unsecured Bondco PLC (B/Stable) and Cerberus Nightingale 1 S.A. (B/Stable), Afflelou is rated at the same level despite a slightly lower leverage, as its business model contains a higher level of risk due to the retail interface. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Afflelou include: - sales growth of 6% in FY17 decelerating to 1%-2% in FY19-20, marking the ongoing transition to closer cooperation with care networks; - EBITDA margin at 21%; - trade working capital outflow of EUR8 million in FY17 gradually reducing to EUR1-2 million outflow thereafter, in line with the pace of the network activity; - capex at 4% of sales; - bolt-on acquisitions of EUR5 million p.a. offset by asset and/or store disposal of EUR1 million; - refinancing assumed on the same terms as the current structure, as Fitch regards such a refinancing option would bear little execution risk. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating action include: - Consistently improving EBITDA as a result of increased network activity and no negative impact from regulatory changes; - FCF margin of at least 5% sustainably; - FFO gross adjusted leverage moving sustainably towards 5.5x; - FFO fixed charge cover improving towards 2.5x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action include: - Deterioration of EBITDA and FCF margins as a result of continued weak network activity, impact of regulatory changes, adverse supplier mix changes or further material increase of the DOS segment; - FFO gross adjusted leverage above 7.0x with no evidence of deleveraging, for example because of operating underperformance or on-going acquisition activity; - Unsuccessful integration of new acquisitions; - FFO fixed charge cover of 1.8x or below. LIQUIDITY Comfortable Liquidity Position Fitch projects the issuer will generate comfortable organic liquidity of EUR12 million in FY17 followed by EUR25-30 million per year thereafter, supported by the strong network performance and the impact of the national care networks. This strong internal liquidity should comfortably accommodate small scale business additions of up to EUR5 million per year. We also point to the presence of a committed RCF of EUR30 million available until November 2018, which we project will remain undrawn until maturity. Contact: Principal Analyst Patrick Durcan Analyst +44 20 7530 1298 Supervisory Analyst Elena Stock Director +49 69 768076 135 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 D-60311 Frankfurt am Main Germany Committee Chairperson Pablo Mazzini Senior Director +44 20 7530 1021 Summary of Financial Statement Adjustments - Operating Leases: Fitch adjusted Afflelou's debt by adding 8x of annual operating leases of EUR20 million in 2016; the amount of operating leases is estimated as 15% of direct-owned stores revenues plus EUR2.5 million of HQ rental cost; - Convertible bonds: Fitch assigned EUR260 million convertible bonds 100% equity credit; - Financial Debt Reported by Afflelou: adjusted to face value, accrued interest on the notes is excluded. 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