(Repeat for additional subscribers)
Feb 20 (The following statement was released by the rating agency)
Fitch Ratings has affirmed French-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'.
The affirmation reflects Rexel's continued profitability resilience in a still
challenging economic environment. Fitch also factors in the group's demonstrated
financial flexibility in 2013, which resulted in lease-adjusted FFO net leverage
decreasing to 4.8x at FYE13 from the high 5.1x at FYE12. The deleveraging was
achieved through the stability of working capital needs, limited dividend
outflow thanks to shareholders' support, and muted acquisition activity. Cash
flow protection measures continue to act as important safeguards for the
ratings. Uncertainties remain over the pace of sales recovery, which remains
strongly correlated with economic activity in the US and Europe, as well as
future acquisition activity in light of Rexel's high liquidity resources.
KEY RATING DRIVERS
Resilient Business Model
As a global distributor of electrical products, Rexel exhibits below-average
business risks relative to most production-focused industrial companies. The
group displays high geographical diversification with increasing presence in
emerging markets, which supports the ratings. The group is also well diversified
by end-markets with a balanced mix between three sectors
Challenging Sales Environment, Profits Resilient
In FY13 organic sales excluding foreign exchange impact decreased by 2.7% mainly
due to European economic sluggishness. Europe (55% of group sales) organic sales
were down 4.8%. However, the group's EBITDA margin held up well, reducing by
only 30bps from FY12 to 5.8%. Better pricing and supplier management allowed
gross margin stability while tight control of direct operating costs (-2.0%
y-o-y) limited the negative operating leverage effect from lower sales.
Steady Profit Generation
Fitch expects Rexel to at least maintain its profit generation in FY14 in light
of the sequential quarter-on-quarter sales growth improvement in Europe and
given Fitch's view of improving world growth, in particular more robust growth
in major advanced economies.
Cash Flow Conversion Capacity Maintained
Despite the drop in revenues and EBITDA, in FY13 Rexel generated strong free
cash flow (FCF) of EUR261m (FY12: EUR168.1m) thanks to tight working capital
management and support received from shareholders, who accepted 74% of the
EUR203m dividend payment in shares. FY12-FY13 average pre-dividend FCF to
EBITDAR was maintained at a healthy level of around 33%. Conservatively assuming
all dividends paid in cash in 2014, Fitch expects the company to be able to
maintain a two-year average pre-dividend FCF to EBITDAR ratio at or above this
level over the next three years.
Strengthened Financial Flexibility
Thanks to healthy cash flow generation and muted acquisition spending, group's
debt was reduced by EUR400m driving FFO lease-adjusted net leverage down to 4.8x
at FYE13 from 5.1x at FYE12). Along with improving economic conditions and
continued solid FCF generation, we expect FFO lease-adjusted net leverage to
stay below 5.0x, consistent with the rating. This is despite a commitment to
acquisition spending, expected to average EUR400m per annum.
Rexel's financial flexibility is further underpinned by strong liquidity, with
EUR906m cash on balance sheet at FYE13 and available committed bank facilities
totalling EUR1.1bn (undrawn at FYE13). Rexel has also access to a EUR500m
commercial paper programme, of which EUR119m was outstanding at FYE13, and
various receivables securitisation programmes.
Comfortable Debt Maturity Profile
Following the refinancing exercise undertaken in 2013, Rexel's average debt
maturity profile is now close to five years, with the first major bond repayment
in FY18 of EUR488.3m. Although prior ranking debt, the securitisation debt is
covered by committed undrawn facilities and cash of EUR2.0bn and should also be
compared with market capitalisation of EUR4.6bn as first loss absorber.
Positive: Future developments that could lead to positive rating actions
-FFO adjusted net leverage below 4.0x on a continuing basis and evidence of
-Continued 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 actions
-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 restriction) 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 negative rating action if the adverse economic climate
- Average two-year pre-dividend FCF to EBITDAR at or below the 25%-30% range
combined with weaker profitability.