TEXT - Fitch raises Picard BondCo SA snr notes to 'BB-'
(The following statement was released by the rating agency) Dec 7 - Fitch Ratings has affirmed Picard BondCo SA's (Picard) Long-term Issuer Default Rating (IDR) at 'B+' with a Stable Outlook. The agency has also upgraded Picard BondCo SA's senior notes rating to 'BB-' with a Recovery Rating of 'RR3' from 'B' with a Recovery Rating of 'RR5' while the Picard Groupe SAS' senior secured bank debt rating has been affirmed at 'BB' with a Recovery Rating of 'RR2'. The upgrade of the senior notes' rating follows the EUR110.5m senior secured debt repayments completed between April 2012 and October 2012. According to the payment waterfall, these repayments mechanically increase the senior notes recovery prospects, now in the 'RR3' range of 51%-70%. As most of the borrowing group's assets are located in France, the senior secured bank debt recovery rating is capped at 'RR2'. The affirmation of the IDR is supported by Picard's strong business profile, which demonstrates its resilience in a lacklustre consumer environment. The expected total EUR110m debt repayments to be completed over financial year ending March 2013 (FY13) are not sufficient to trigger a positive change in the IDR or even Outlook, although they clearly improve the company's financial flexibility and deleveraging pace. A Positive Outlook requires improved operating performance, both in terms of like-for-like sales growth and EBITDAR margin. The present economic environment, Picard's operating performance and Fitch's forecasts do not currently point in this direction. KEY DRIVERS: Resilient Operating Model: Picard Bondco S.A's (Picard) rating reflects the group's leadership in the French frozen food market, and its resilience in the face of an increasingly competitive market and a depressed economic environment. In H113 Picard enjoyed positive like-for-like sales growth of 1.6% in France, thanks to a continuous increase in traffic. This growth did not come at the expense of the EBITDA margin. Operating Margins Maintained: In H113 Picard maintained its H112 EBITDA margin, thanks to favourable contract renegotiations with food suppliers offsetting operating costs inflation. Yet Fitch expects increasing pressure on margins, as weakening like-for-like sales growth should lead to weaker absorption of personnel, energy and rental costs. Openings in new markets (presently Belgium and Sweden) also weigh on EBITDA. In addition, the full absorption of the higher marketing expenses made to support French sales is conditional on continuous improvement in gross profit margin. Debt Repayments Favour Deleveraging: Thanks to expected total debt repayments of EUR110.5m in FY13, including EUR60m Term Loan B prepayments, Fitch expects Picard's funds from operations (FFO) adjusted leverage to decrease to 5.4x at FY13 from 5.6x at FY12. Fitch forecasts the company to keep on deleveraging thanks to a further increase in EBITDA and average free cash flow generation of 5.5% of sales per year, leading to further debt repayments. Commercial Effort in France: Conscious that France remains the sole EBITDA contributor, Picard has pursued a few initiatives aimed at maintaining a positive like-for-like sales growth in France. It completed the roll-out of its stores' new check-out points in July 2012, is preparing the launch of a modernized website in February 2013 and is spending more on advertising campaigns. Fitch believes these actions should support the maintenance of a positive - if limited - like-for-like sales growth in France in FY13. Untested Business Model Abroad: Picard is experiencing difficulties in Italy, where the crisis has slowed down investment and until now kept the EBITDA break-even point out of reach. Fitch considers the FY12 investments in Belgium and Sweden as positive in the long term, but factors into the current rating Picard's unproven ability at exporting its business model abroad and the prospects of, albeit limited, negative cash flows from these projects at least until FY15. RATING SENSITIVITY GUIDANCE: Positive: Future developments that could lead to positive rating actions include: - Increase in like-for-like sales, EBITDA and cash generation - Sustained deleveraging though debt repayments leading to FFO adjusted gross leverage falling permanently below 5.0x - FFO fixed charge cover ratio above 2.5x Negative: Future developments that could lead to negative rating action include: - Negative like-for-like sales growth and significant EBITDA margin erosion - FFO adjusted gross leverage remaining above 6.0x at FY14 - Weak free cash flow generation as percentage of sales (Caryn Trokie, New York Ratings Unit)