RPT-Fitch Affirms L'Oreal SA at 'F1+'

Wed Feb 12, 2014 6:45am EST

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Feb 12 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed L'Oreal SA's (L'Oreal) Short-term Issuer Default Rating (IDR) at 'F1+'. The agency has also affirmed l'Oreal USA Inc's commercial paper (CP) programme, guaranteed by L'Oreal, at 'F1+'.

KEY RATING DRIVERS

Financial Flexibility Unaffected

The rating action follows L'Oreal's announcement that it will buy back 48.5m shares of its shares from shareholder Nestle (AA+/Stable). L'Oreal will pay for these shares partly by transferring its 50% stake in Swiss dermatology company Galderma (the other 50% is already owned by Nestle) at an equity value of EUR2.6bn and the remaining with a EUR3.4bn cash disbursement during 2014. Fitch notes that L'Oreal will not have to sell any of its Sanofi SA stake to fund this purchase. The transaction will be earnings accretive, as the shares will be cancelled and group dividends reduced.

Low Leverage to Remain

This transaction will increase, albeit temporarily, L'Oreal's lease-adjusted leverage; we estimate pro-forma gross funds from operations (FFO) leverage will grow to 1.3x-1.4x at FYE14 from 0.9x for FYE12 and FYE13. The group's strong annual free cash flow generation of well over EUR1bn should ensure that debt and, hence, leverage should rapidly reduce towards 1.0x. Fitch estimates that L'Oreal could return to a small net debt position by 2016.

Business Profile Remains Strong

The rating continues to reflect L'Oreal's strong business profile and financial flexibility. The business profile is underpinned by the group's leading position in the cosmetics industry and by its comprehensive market coverage, as seen in its diversification by segment, product, price range and geography. The sale of Galderma will allow L'Oreal to concentrate on its cosmetics business, whereas the share buyback reinforces the position of long-term shareholder, the Bettencourt Meyers family, whose shareholding as a result of this transaction will rise to 33.3%.

Financial Policy, Operating Performance

Fitch will continue to monitor L'Oreal's financial policy - which is characterised by steadily increasing returns to shareholders and measured bolt-on acquisitions - or for any deterioration in its operating performance, notably from its sales exposure to the more cyclical luxury and hair care professional markets.

RATING SENSITIVITIES

Negative: Future developments that could lead to negative rating action include:

-Sharp deterioration of group's free cash flow

-Adjusted gross FFO leverage ratio of more than 2.0x (1.5x net) or temporarily higher (assumed after use of L'Oreal's Sanofi shares as a source of funding)

-Total CPs back-up lines falling below 100% of total amount drawn under the CP programmes

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