TEXT-S&P ups Rexel to 'BB'; outlook stable
(The following statement was released by the rating agency)
-- France-based Rexel S.A. , a world-leading distributor of electrical supplies, has demonstrated strong credit metrics so far this year.
-- We believe that Rexel can sustain these metrics, even considering an increase in acquisition activity.
-- We are therefore raising our long-term corporate credit rating on Rexel to 'BB' from 'BB-' and affirming our 'B' short-term corporate credit rating on the group.
-- The stable outlook reflects our view that Rexel and its shareholders are able and willing to sustain credit metrics commensurate with the higher rating, such as FFO to debt of about 20%.
Standard & Poor's Ratings Services said today that it raised its long-term corporate credit rating on France-based electrical parts distributor Rexel S.A. to 'BB' from 'BB-'. In addition, we affirmed our 'B' short-term corporate credit rating on Rexel. The outlook is stable.
At the same time, we raised to 'BB' from 'BB-' our issue ratings on Rexel's cumulative EUR1.5 billion revolving credit facilities (RCFs) and EUR650 million and EUR500 million senior unsecured notes. The recovery ratings on these instruments are unchanged at '4'.
The upgrades reflect Rexel's strong operating performance so far in 2011, with organic sales growing by 6.6% and the EBITDA margin improving to 6.1% in the first nine months of 2011. Furthermore, the upgrades reflect our opinion that the group's credit metrics will remain commensurate with the higher rating, such as funds from operations (FFO) to debt of about 20% over the next year. (Rolling 12-month FFO to debt was 20.6% at the end of September 2011.)
In our view, Rexel can maintain these credit metrics despite an anticipated pick-up in acquisition activity and potential moderate shareholder returns. Management has indicated that it has a spending capacity of EUR400 million for acquisitions. However, actual acquisition spending has been limited so far this year, with about EUR57.7 million reported in the first nine months of 2011 (representing a contribution from sales of about EUR150 million). While we believe that investing the full EUR400 million this year would utilize some of the rating headroom, we do not assume this is likely in our base-case credit scenario.
Rexel's shareholder structure largely consists of private equity investors with only 26.9% of publicly traded shares. We note that Rexel's shareholder structure could be subject to change as the current private equity investors have been invested in the group for over six years. Nevertheless, based on our recent meetings with the three largest shareholders, 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.
In our opinion, 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%.
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 driven by significantly weaker end-market conditions than we currently anticipate, with the EBITDA margin returning to the low level of 4% in 2009, 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 Industrial 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 Building Materials Industry 2008, 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
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