TEXT - Fitch affirms Rexel SA issuer default ratings
(The following statement was released by the rating agency) Feb 22 - Fitch Ratings has affirmed France-based electrical distributor Rexel SA's (Rexel) Long-term Issuer Default Rating (IDR) at 'BB' and Short-term IDR at 'B'. The Outlook is Stable. Fitch has also affirmed the senior unsecured rating at 'BB' and Rexel's EUR500m Commercial Paper Programme at 'B'. KEY DRIVERS: Challenging Environment, Solid Performance: Although FY12 sales declined by 1.8% in organic terms, the group's reported EBITA margin remained stable at 5.7%. The decrease in Latam and APAC profitability (together representing 9% of group EBITA before central costs), which are less mature markets and where the company has a smaller footprint, was compensated by improvements in Europe and North America, where the group benefits from continuing cost control and savings derived from bolt-on M&A activity. Although Rexel is targeting further EBITA margin expansion (above 6.5% in 2015), the current rating factors more conservative gains through the economic cycle (up to 6% by 2015). Resilient Business Model: Rexel benefits from adequate geographical diversification, strong market shares in core markets and increasing presence in fast-growing emerging countries. We expect Rexel to keep on gradually improving its profitability, notably by shifting its sales mix towards higher added value products and services - part of its "Energy in Motion" strategic plans - and by continuously optimising its branch network and headcount. Despite difficult economic conditions, Rexel's EBITA margin increased by 80 bps between 2008 and 2012. In the event of a new economic downturn Fitch does not expect the company's profitability to decrease in the same proportion to sales as it did in 2009 when Rexel was in the middle of integrating the acquisition of Dutch-based electrical distributor Hagemeyer. Free Cash Flow Critical: Pre-dividend FCF to EBITDAR remained above 30% in 2012. Rexel has demonstrated the ability to remain cash flow generative throughout the economic cycles, notably thanks to its business model resilience, low capital intensity and control over working capital, which enhances cash flow from operations through a recession. Despite still weak economic prospects for 2013 and a sustained dividend pay-out, Fitch expects Rexel's positive FCF to average c. EUR210m per annum to 2016. Financial Flexibility, M&A Appetite: The high amount of acquisition expenditures in 2012, along with worsening operating performance in H2, resulted in some deterioration in credit metrics, notably with FFO adjusted net leverage rising to 5.1x at year-end 2012 from 4.2x at year-end 2011. Thanks to its solid FCF generation capacity and assuming more limited acquisition spending (EUR200m annually) Fitch is confident the company will regain headroom under its 'BB' rating in 2013, reverting to the lower leverage seen in 2011, of 4.5x or less, by 2015/2016. Relaxed Debt Maturities: Excluding the securitisation and commercial paper programmes, Rexel benefits from a relatively smooth maturity schedule. In addition, Rexel's 2013 plans to extend its debt maturity profile are considered a positive factor and achievable, considering past access to financial markets. The company is in the process of renegotiating the Facility B of its bank debt maturing in 2014 to extend it by five years, and plans to issue a new bond to finance an earlier redemption of its EUR586.3m bond maturing in December 2016. It also plans to extend the maturity of its securitisation programme by at least two years. RATING SENSITIVITY GUIDANCE: Positive: Future developments that could lead to positive rating actions include: - FFO adjusted net leverage below 4.0x on a continuing basis and evidence of resilient profitability. - The continuation of strong cash flow conversion, measured as pre-dividend FCF to EBITDAR average for two years consistently above 30%. Negative: Future developments that could lead to negative rating action include: - A large debt-funded acquisition, or a deeper than expected economic slowdown with no corresponding increase in FCF (notably due to working capital inflow and dividend reduction) resulting in (actual or expected) FFO adjusted net leverage above 5.0x for more than two years. - A more aggressive shareholder-friendly stance weakening credit protection measures could result in a negative rating action if the tough economic climate persists. - Average two-year pre-dividend FCF to EBITDAR at or below the 25%-30% range combined with weaker profitability. (Caryn Trokie, New York Ratings Unit)
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