TEXT - Fitch raises Picard BondCo SA snr notes to 'BB-'

Fri Dec 7, 2012 9:52am EST

(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)