October 19, 2018 / 6:36 PM / a year ago

UPDATE 1-Moody's, S&P ratings downgrade round off tough week for DIA

(Adds S&P downgrade)

Oct 19 (Reuters) - Standard & Poor’s and Moody’s downgraded Spanish supermarket chain DIA’s credit ratings to below investment grade, after the retailer issued its third profit warning in 12 months earlier this week.

Both ratings houses also placed their valuations under review on Friday. According to analysts, mounting pressure on DIA may force it towards a capital increase.

“The leverage will rise significantly to ~ 2.9x (assuming the expected average EBITDA’18 range, 350/400 M euros.) In addition, this puts at risk the refinancing needs of 2019 maturities (422 M euros, 35 pct DFN), which makes the possibility of a capital increase more and more probable”, said Sabadell analysts after Moody’s downgrade.

Moody’s cut to “Ba2 from “Baa3”, and S&P’s move to “BB-“ from “BBB-“, is the latest blow to the retailer which has lost more than two-thirds of its market value since a 2015 peak.

S&P said the result of its review of DIA’s rating can end either with an affirmation of the ‘BB-‘ issuer credit rating or a cut by up to two notches.

“Our decision to downgrade DIA’s ratings and to place them under review reflects Moody’s view that earnings will fall meaningfully in 2018 and 2019, on the back of market share losses in Spain and currency depreciation in emerging markets,” Moody’s analyst Vincent Gusdorf said.

The magnitude of the earnings revision highlights weaknesses in DIA’s business model and governance, which will likely make it difficult to recover its competitive position and improve its operating performance going forward, Gusdorf said.

After making gains from cash-strapped customers during Spain’s economic crisis, DIA is now struggling against tough competition from local rival Mercadona and German discounters Lidl and Aldi.

LetterOne, an investment vehicle owned by Russian tycoon Mikhail Fridman, prompted speculation of a possible takeover when it disclosed a 29 percent stake in DIA last month. This is just below a 30 percent threshold where an investor must make a full buyout offer under Spanish law.

Reporting by Joanna Jonczyk-Gwizdala, Katarzyna Zajaczkowska in Gdynia Editing by Jane Merriman and Louise Heavens

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