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Fitch Affirms Metro AG at 'BBB-'/Negative; Withdraws Ratings
December 5, 2016 / 4:21 PM / a year 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: 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 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. 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