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July 9 (The following statement was released by the rating agency)
Fitch Ratings has upgraded French-based foodservices company Elior SA's (Elior) (previously Holding Bercy Investissement SCA) Long-term Issuer Default Rating (IDR) to 'BB-' from 'B+'. The ratings of Elior's senior secured credit facilities and Elior Finance & Co. SCA's EUR350m senior secured notes were upgraded to 'BB+' from 'BB-'.
All ratings have been removed from Rating Watch Positive (RWP). The Outlook on the Long-Term IDR is Stable.
The upgrade reflects the recent completion of a EUR954m initial public offering (IPO) by the group, which has been used partly to repay secured bank and bond debt. Fitch estimates Fitch-adjusted funds from operations (FFO) gross leverage to decline to 5.2x post-IPO from 7.6x at the financial year ended September 2013. The ratio should remain at or below 5.0x thereafter. The upgrade of the senior secured credit facilities and notes' ratings reflect enhanced recoveries post IPO.
KEY RATING DRIVERS
Declining but High Leverage
The IPO of EUR954m (EUR785m of new shares and EUR169m of existing shares) would have reduced FYE13 FFO adjusted gross leverage to a still high 5.2x from 7.6x. Fitch expects credit metrics to show additional improvement by FY15, driven by moderate organic sales growth and mild profit margin expansion as extraordinary costs dissipate. Thereafter, any meaningful deleveraging will be predicated on continued profit growth and Fitch does not expect any further material repayment of debt prior to bullet maturities in 2019/2020.
Elior's geographical concentration in France and other southern European countries remains a constraining factor on the rating relative to its closest peers Compass (A-/Stable) and Sodexo (BBB+/Stable), which maintain broader geographical diversification.
Balanced Business Profile
The ratings continue to reflect Elior's balanced business profile resulting from its broad product offering, strong customer and business diversification, and high barriers to entry in the catering sector. The group possesses several company-specific traits akin to low investment grade business services companies such as a broad range of services and customer diversification as well as a high proportion of contracted revenues and low renewal risk.
In addition, Elior's public listing will further diversify the group's funding sources and enhance its financial flexibility.
Strong Cash Flow Conversion
The asset-light nature and low capital intensity of the business should allow Elior to convert operating profits into positive cash flow before debt service; Fitch estimates free cash flow (FCF) margin averaging 2% of sales over the next four years. This should provide some financial flexibility, a key supporting factor of the company's credit profile. However, FFO fixed charge cover is expected to be 2.4x by FY15 (around 2.0x pre-IPO), which is at the lower end of expectations for the 'BB-' rating.
Long-Term Outsourcing Trend
The long-term trend toward outsourced foodservices is expected to support continued sales and profit growth over the medium term.
Diversified Profit Drivers
Elior's contract catering and support services segment (representing 68% of FY13 group EBITDA) is a key anchor of the ratings. We expect profitability under these contracts, which is largely P&L based (ie where the provider is paid for the service and bears the costs), to remain steady in a low inflationary environment while retaining any productivity improvements. We also expect concession activities, accounting for one-third of group EBITDA, to remain structurally more profitable, albeit more capital-intensive, than contract catering over the next two years.
Unrestricted cash of EUR260m at end-March 2014 (EUR210m at FYE13), together with access to nearly EUR170m of undrawn revolving credit facilities post-IPO, is sufficient to address business needs and moderate debt repayments for 2014 and 2015 of around EUR300m.
Positive: Future developments that could, individually or collectively, lead to positive rating actions include:
- Additional diversification of operations either by operating segment and/or geography
-Further de-leveraging resulting in FFO adjusted gross leverage below 4.5x on a sustained basis
- FFO fixed charge coverage sustained above 3.0x (FYE13: 1.7x)
- FCF/total adjusted debt margin above 12% (FYE13: Negative)
Negative Future developments that could, individually or collectively, lead to positive rating actions include:
-FFO adjusted gross leverage above 6.5x on a sustained basis
- FFO fixed charge coverage below 2.0x on a sustained basis
- FCF/total adjusted debt margin below 2%