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RPT-Fitch Assigns Rexel's Planned Unsecured Bond Issue 'BB(EXP)'
March 19, 2013 / 10:11 AM / 5 years ago

RPT-Fitch Assigns Rexel's Planned Unsecured Bond Issue 'BB(EXP)'

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March 19 (Reuters) - (The following statement was released by the rating agency) Fitch Ratings has assigned Rexel SA’s (Rexel) planned dual-tranche USD500m and EUR500m notes issue an expected senior unsecured rating of ‘BB(EXP)'. The final ratings are contingent upon the receipt of final documents conforming to information already received by Fitch. Fitch rates Rexel’s Long-term Issuer Default Ratings (IDR) at ‘BB’ with a Stable Outlook. The Short-Term IDR and Commercial Paper rating are both ‘B’. Rexel will launch a dual EUR/USD tranche of senior unsecured notes (planned EUR500m and USD500m) maturing in 2020. Simultaneously, Rexel will send a conditional make whole notice for the 2016 senior notes as it plans to buy back the notes (representing EUR630m including the make-whole premium) provided that it can issue at least EUR500m on the euro tranche. The proposed bond refinancing, together with the refinancing of its existing EUR1.1bn senior credit facilities by a single revolving credit facility (RCF) of the same amount maturing in 2018 will allow Rexel to extend its average debt maturity profile by at least two and a half years while boosting liquidity. The planned bond will be unguaranteed, ranking pari passu with the new RCF which is expected to be undrawn at closing. Moreover, the two other existing bonds will lose their guarantees as a result of the full repayment of the previous bank facility, reflecting the move to a simplified capital structure with most of the debt raised at the holding level (Rexel SA), unsecured, unguaranteed and ranking pari passu. Although bondholders will only have a claim to the parent company, there is cross-default with additional group debt above a minimum threshold of EUR75m. Rexel’s securitisation debt, finance lease obligations and debt incurred by subsidiaries (together referred to as senior debt) will continue to rank ahead of debt incurred by Rexel SA. However, any structural subordination concerns are mitigated by expected limited senior leverage, measured as senior debt/EBITDA, below the threshold of 2x considered by Fitch as critical (1.4x based on FY12’s EBITDA). As a result we expect average recovery prospects for unsecured bondholders in the event of default. However, should Rexel permanently incur senior indebtedness exceeding 2x EBITDA (representing around EUR450m of incremental debt including availability under securitisation lines) then a one notch downgrade on the senior unsecured rating may be warranted. KEY RATING DRIVERS: Challenging Environment, Solid Performance: Although FY12 sales declined by 1.8% in organic terms, the group’s reported EBITA margin remained stable at 5.7%. The decrease in Latam and APAC profitability (together representing 9% of group EBITA before central costs), which are less mature markets and where the company has a smaller footprint, was compensated by improvements in Europe and North America, where the group benefits from continuing cost control and savings derived from bolt-on M&A activity. Although Rexel is targeting further EBITA margin expansion (above 6.5% in 2015), the current rating factors more conservative gains through the economic cycle (up to 6% by 2015). Resilient Business Model: Rexel benefits from adequate geographical diversification, strong market shares in core markets and increasing presence in fast-growing emerging countries. We expect Rexel to keep on gradually improving its profitability, notably by shifting its sales mix towards higher added value products and services - part of its “Energy in Motion” strategic plans - and by continuously optimising its branch network and headcount. The degree of flexibility in its cost base along with clear focus on cost efficiency measures has enabled Rexel to increase its EBITA margin by 80bps between 2008 and 2012. Free Cash Flow (FCF) Critical: Pre-dividend FCF to EBITDAR remained above 30% in 2012. Rexel has demonstrated the ability to remain cash flow generative throughout the economic cycles, notably thanks to its business model resilience, low capital intensity and control over working capital. Despite weak economic prospects for 2013 and a sustained dividend pay-out, Fitch expects Rexel’s positive FCF to remain above EUR150m in 2013 and to average c. EUR215m per annum to 2016. Financial Flexibility, M&A Appetite: The high amount of acquisition expenditures in 2012, along with worsening operating performance in H2, resulted in some deterioration in credit metrics, notably with funds from operations (FFO) adjusted net leverage rising to 5.2x at year-end 2012 from 4.2x at year-end 2011. Thanks to its solid FCF generation capacity and assuming more limited acquisition spending (EUR200m annually) Fitch is confident the company will regain headroom under its ‘BB’ rating in 2013, reverting to the lower leverage seen in 2011, below 4.5x, by 2015. RATING SENSITIVITY GUIDANCE: Positive: Future developments that could lead to positive rating actions include: - FFO adjusted net leverage below 4.0x on a continuing basis and evidence of resilient profitability. - The continuation of 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 action include: - 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/or dividend reduction) 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 a negative rating action if the tough economic climate persists. - Average two-year pre-dividend FCF to EBITDAR at or below the 25%-30% range combined with weaker profitability.

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