Fitch Places Dixons' 'B' IDR on Rating Watch Positive

Thu Sep 5, 2013 11:14am EDT

(The following statement was released by the rating agency) LONDON, September 05 (Fitch) Fitch Ratings has placed Dixons Retail plc (Dixons) Long-term Issuer Default Rating (IDR) of 'B' and senior unsecured ratings of 'B+' on Rating Watch Positive (RWP) applicable to Dixons' guaranteed bonds due in 2015 and 2017. The Short-term IDR has been affirmed at 'B'. These rating actions follow the announcement of the disposal of Dixons' online unit PIXmania and Electroworld operations in Turkey. The RWP takes into account the improvement envisaged by Fitch in Dixons' operating and financial profile following the closure of the proposed deal. Fitch expects Dixons' group EBIT margin to trend towards 2% by FY15 (FY13:1.6% pre-disposal) and that the disposal of its loss making business, PIXmania will reduce the uncertainty and improve visibility of Dixons' credit profile. Management will now have fewer distractions and will be able to focus more on its UK and Nordics businesses which are currently performing well. Fitch expects the group to continue to maintain a prudent financial policy. KEY RATING DRIVERS Ratings Upside Fitch expects that the completion of the disposal has the potential to result in one-notch upgrade. Post disposal, Dixons' credit profile will be driven predominantly by its core UK and Nordics business. It will be important for Dixons to prove the improvement of its current profit margin in its core operations, leverage profile amid a competitive industry in order to achieve its longer-term objectives. Continued Improvement in Operating Trend Dixons continues to benefit from its "Renewal and Transformation" programme. The group has got its service proposition and product range on track and refurbished and streamlined its store portfolio. Like-for-like (LFL) sales have been positive since April 2012, despite a difficult trading environment in the UK and Ireland and competitive environment in the Nordics. UK and Ireland's LFL sales were up 6% for Q114 (quarter ended 31 July 2013) and 5% in northern Europe. Group EBIT margin was 1.6% in FY13 and Fitch expects this to trend above 2% following the disposals by FY15. Strengthened Market Position The consolidation in the industry in the UK over the past two years, including the closure of 11 Best Buy Co., Inc. (BB-/Negative) stores and the disposal of Comet (owned by Darty, formerly known as Kesa, unrated), has helped to create a more favourable competitive environment for Dixons. In the Nordics, there have been a number of significant exits from the independent sector and heavy price competition. Overall, Dixons is in a much stronger position than a few years ago. Strengthened Credit Metrics Group lease-adjusted net debt/EBITDAR improved to 4.7x in FY13 (FY12:5.1x) and FFO net leverage was 5x in FY13 (FY12: 5.9x). Total adjusted debt was GBP3.3bn, reflecting that most of Dixons' adjusted debt is linked to the capitalisation of the group's operating leases. Therefore, in the context of total adjusted debt, the EUR69m of investment required to dispose of PIXmania is relatively small even though the elimination of losses from PIXmania should be a big driver of Dixon's profit improvement expected by FY15 (ending April 2015). FFO fixed charge coverage remained stable at 1.3x in FY13 (FY12:1.3x) and is expected to improve mildly to 1.5x by FY15. Improving Liquidity Profile The liquidity problems that affected Dixons in 2008-2009 have abated. The company has managed an equity injection, restructured its capital structure through refinancing and extending the maturity of its revolving credit facility (GBP225m due June 2015) and issued two bonds due in 2015 (GBP100m) and 2017 (GBP150m). RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to a positive rating action include: - Completion of the sale of PIXmania and its Turkish operations on the announced terms. - Group EBIT margin improving to 2.5%. - A sustainable positive LFL sales growth in core areas (the UK and Ireland and the Nordic region). - Lease-adjusted net debt to EBITDAR below 5x or lease-adjusted net debt/FFO decreasing to below 5.5x and/or ability to maintain positive free cash flow generation. Negative: Future developments that may, individually or collectively, lead to a stabilisation of the rating at the current level include: - Deterioration in its operating performance such that EBIT margin falls below 1.5% - Lease adjusted net debt/EBITDAR above 5x or lease adjusted net debt/FFO higher than 5.5x. - Inability to complete the announced disposals and material deterioration in its southern European businesses and PIXmania depleting group cash flows and eroding the group's liquidity buffer. Contact: Principal Analyst Roma Patel Analyst +44 20 3530 1465 Supervisory Analyst Ching Mei Chia Director +44 20 3530 1068 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. 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, 'Corporate Rating Methodology', dated 5 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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