Fitch Downgrades Solocal to 'C'

Fri Feb 14, 2014 9:51am EST

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(The following statement was released by the rating agency) LONDON, February 14 (Fitch) Fitch Ratings has downgraded Solocal Group's (Solocal) Long-term Issuer Default Rating (IDR) to 'C' from 'B-'. The Outlook was previously Negative. Fitch has also downgraded PagesJaunes Finance & Co S.C.A's senior secured notes rating to 'CCC-' from 'B+'. The downgrades follow Solocal's announcement that if required, the issuer intends to use a 'conciliation' and potentially a 'sauvegarde financiere acceleree' (SFA), both considered as French court interventions, to implement its refinancing. The SFA would only be used if Solocal were to get between two-thirds and an insufficient 90% of the consent required from term loan lenders to amend and extend the maturity of its EUR1.3bn term loan debt. According to Fitch's 'Distressed Debt Exchange' criteria dated 2 August 2013, a distressed debt exchange (DDE) includes a material change in terms, conducted in order to avoid intervention proceedings, which the SFA or conciliation would be. Fitch considers Solocal's proposed EUR361m rights issue and the EUR79m reserved capital increase, together with the extension of the term loan maturities to 2018 as credit positive, each being conditional upon the other. However, the intention to use conciliation and/or the SFA route, which may lead to the cram-down of non-voting debt holders, is considered by Fitch to be a DDE. Furthermore, in the agency's view, failure to agree to the proposed structure changes would also restrict the group's ability to refinance its debt when maturities come due in September 2015. Execution of a DDE typically results in the group's IDR being downgraded to 'Restricted Default' ('RD'). Shortly after the DDE is completed, the IDR will be re-rated and typically raised to a performing level. KEY RATING DRIVERS Continued EBITDA Attrition In February 2014, Solocal announced a reduction of its gross operating margin (GOM, EBITDA before staff profit sharing, which is Solocal's proxy for EBITDA) for 2013 by 8.7% to EUR424.3m with an expected further reduction in 2014 to EUR355-375m. Consequently, Solocal is likely to approach the time when it must refinance its large 2015 maturities without demonstrating that it has successfully stabilised its core business. Slowing Internet Revenue Growth Solocal's internet revenue growth was 1.6% in 2013, with more aggressive competition from traditional media as well as other digital media impacting the company's growth. While cyclical factors are likely to be affecting the company's online revenue growth, Fitch is concerned that part of this decline may be structural, reflecting changes in the French advertising market. Continued Digital Transition Although Fitch recognises management's ability to manage the reduction in print revenues and the growth in internet revenues in a more successful way than peers across Europe, with internet revenues representing 63% of 2013 total revenues and expected to grow to 75% of total revenues by 2015, the transition to a digital business is still in progress. Strong Brand Name Fitch recognises the strength of the PagesJaunes brand and the company's presence in the online segment. This could allow Solocal to stabilise cash flows. However, Fitch does not have visibility on when this could occur. Positive Cash Flow Generation Fitch believes that despite the challenges that Solocal faces in its continued transition towards a digital media company, it will still generate positive cash flows and meet its debt service requirements until the significant bullet debt repayments that are due in 2015. However, failure to reach agreement on Solocal's current proposals would mean it is unlikely that the company would be able to successfully refinance its current debt in 2015. RATING SENSITIVITIES Negative: Future developments that could lead to negative rating action to 'RD' include: -Execution of the DDE. Positive: Future developments that could lead to positive rating actions include (after DDE completed): -Progress in refinancing Solocal's 2015 maturities. -Stabilisation of Solocal's GOM and cash flow generation. -Other factors include sustained internet revenue growth and no significant erosion in EBITDA margin. Contact: Principal Analyst Owen Fenton Associate Director +44 20 3530 1423 Supervisory Analyst Cecile Durand-Agbo Director +44 20 3530 1220 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Edward Eyerman Managing Director +44 20 3530 1359 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 and ‘Distressed Debt Exchange’, dated 2 August 2013 is available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Distressed Debt Exchange 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. 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