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Feb 20 (Reuters) - (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.
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 (industrial/residential/commercial).
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 include:
-FFO adjusted net leverage below 4.0x on a continuing basis and evidence of resilient profitability.
-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 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 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 persists.
- Average two-year pre-dividend FCF to EBITDAR at or below the 25%-30% range combined with weaker profitability.