RPT-Fitch Rates Casino's Reset Rate Notes 'BB(EXP)'; 50% Equity Credit Assigned
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Oct 15 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Casino Guichard-Perrachon SA's (Casino; BBB-/Stable) proposed deeply subordinated fixed to reset rate (DS) Notes a 'BB(EXP)' expected rating. Fitch will apply a 50% equity credit treatment to the issue. The final rating is contingent on the receipt of final documents conforming materially to the preliminary documentation.
The rating reflects the highly subordinated nature of the notes, which are considered to have lower recovery prospects than pure debt instruments in a liquidation or bankruptcy scenario. The equity credit reflects the structural equity-like characteristics of the instruments including subordination, a maturity in excess of five years and deferrable interest coupon payments with no look-back provisions. The equity credit is limited to 50%, given the cumulative interest coupon, a feature considered more debt-like in nature.
The notes' rating and assignment of equity credit are based on Fitch's hybrid methodology, ("Treatment and Notching of Hybrids in Non-financial Corporate and REIT Credit Analysis" dated December 2012 at www.fitchratings.com).
KEY RATING DRIVERS FOR THE NOTES
Equity Treatment Given Equity-like Features
The securities qualify for 50% equity credit as they meet Fitch's criteria with regard to deep subordination, remaining effective maturity of at least five years and deferrable interest coupon payments at the option of the issuer. Fitch regards these as key equity-like characteristics, allowing Casino more financial flexibility. The terms and conditions of the notes also avoid mandatory repayments, and exclude covenant defaults as well as all other events of default, including cross default, that could trigger a general corporate default or liquidity need.
No Maturity Date
The notes are undated securities and have no specified maturity date. The issuer first has the option to redeem the notes on the first reset date.
Cumulative Coupon Limits Equity Treatment
The coupon payments are cumulative and incur interest where overdue by more than one year. The company will be obliged to make a mandatory settlement of interest arrears payments under certain circumstances, including following the payment of a dividend. This is a feature similar to debt-like securities and provides the company with reduced financial flexibility. Fitch has therefore only applied equity treatment of 50% of the notes.
Rating Reflects Deep Subordination
The notes have been notched down by two notches from Casino's IDR given their deep subordination and consequently the lower recovery prospects in a liquidation or bankruptcy scenario relative to the senior obligations. The notes only rank senior to the claims of equity shareholders.
KEY RATING DRIVERS FOR CASINO
Strengthening Business Model
In 2013, Casino gained full control of Monoprix in France, and GPA in Brazil following the agreement reached with Mr Diniz on 6 September. The full integration of Monoprix from Q213 and the full consolidation of GPA into its accounts in 2013 strengthen the group's business profile in terms of format and geographic diversification, as well as in terms of sales growth prospects and profit margin resilience.
Growing Exposure to Emerging Markets
Over the past three years, Casino's acquisitions have enlarged international operations, including GPA in Brazil and Carrefour stores in Thailand. These significantly increase its exposure to markets with underlying favourable growth trends, although they also expose the group to country risk in the markets where it operates. Fitch expects international operations to represent more than 60% and 73% of Casino's 2013 revenues and EBIT compared with 38% and 41%, respectively, in 2010.
Challenging French Economy
Key challenges facing Casino relate to the soft consumer environment in France, which mainly negatively affects its larger formats (hyper- and supermarkets). Since 2012, the group has been cutting prices and adjusting its product offer to meet anaemic consumer demand and intense competition from other large food retailers. Any meaningful positive impact from these initiatives on hyper- and supermarket sales and profit margins has yet to be seen despite the positive momentum seen in Q313.
Free Cash Flow to Improve
Fitch expects Casino to benefit from Monoprix's and GPA's full integration in terms of cash flow generation as they are more profitable and cash-generative than Casino. Although remaining a low percentage of sales, Fitch expects FCF to strengthen beyond EUR200m in 2013 and EUR300m in 2015.
Rating Headroom to Improve
From a financial perspective, the rating headroom is currently limited at the current 'BBB-' rating. Casino's lease-adjusted net FFO leverage peaked at 4.5x in FY12, while the FFO fixed charge cover was relatively weak at 2.3x (both ratios with GPA proportionally consolidated: lease-adjusted net Debt/EBITDAR equivalent is 3.9x). The group should regain reasonable headroom under its rating in the next two years, thanks to the 100% consolidation of GPA and Monoprix from FY13 onwards. Casino should also benefit from further asset disposals in FY13 and FY14. The scale of debt reduction that can be achieved through these disposals will therefore be considered a supporting factor to the ratings.
Positive: Future developments that could lead to positive rating actions include:
- The group's capacity to maintain positive like-for-like growth.
- FFO fixed charge cover above 3.0x.
- Lease-adjusted FFO net leverage (adjusted for debt-like obligations) below 3.5x on a sustainable basis (equivalent to 3.0x lease-adjusted net debt/EBITDAR).
Negative: Future developments that could lead to negative rating action include:
- Sharp contraction in group's like-for-like sales growth and EBIT.
- FFO fixed charge cover below 2.0x.
- Lease-adjusted FFO net leverage (adjusted for debt-like obligations) above 4.2x (equivalent to 3.7x lease-adjusted debt/EBITDAR) on a sustained basis.
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