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Fitch Assigns 3AB Optique Developpement's Senior Secured Notes 'B+' Final Rating
October 20, 2017 / 2:34 PM / a month ago

Fitch Assigns 3AB Optique Developpement's Senior Secured Notes 'B+' Final Rating

(The following statement was released by the rating agency) LONDON, October 20 (Fitch) Fitch has assigned France-based 3AB Optique Developpement S.A.S.'s EUR250 million fixed rate senior secured notes due 2023 and EUR175 million floating rate senior secured notes due 2023 a final rating of 'B+'/RR3-. The notes have been issued as part of the refinancing by the parent company, France-based Lion/Seneca France 2 S.A.S. (as the entity controlling the optical franchisor Afflelou) Fitch has also affirmed Afflelou's Long-Term Issuer Default Rating (IDR) at 'B' and the EUR30 million super senior revolving credit facility (SS RCF) at 'BB-'/RR2/90%. The Outlook is Stable. Furthermore, following the redemption of the existing notes, Fitch has withdrawn the 'BB-' rating of the EUR365 million senior secured notes issued by 3AB Optique Developpement S.A.S. and the 'CCC+' rating of the EUR75 million senior notes issued by Lion/Seneca France 2 S.A.S. The assignment of the final rating and the affirmation of the IDR and the SS RCF instrument rating follow a review of the final documentation which materially conforms to the information received at the time the agency assigned an expected rating to the notes on 3 October 2017. The new notes are secured by pledges over certain share pledges, bank accounts and intercompany receivables and benefit from senior, joint and several guarantees provided by certain group entities. On enforcement, the notes will rank behind the SS RCF. KEY RATING DRIVERS Lower Recoveries for Senior Secured Creditors: We project the new senior secured notes will see lower recoveries equivalent to 'RR3' compared with 'RR2' under the previous structure given a higher amount of senior secured debt post refinancing. Transaction Improves Financial Profile: The completed refinancing has reduced gross debt to EUR425 million (excluding the EUR30 million RCF) from EUR440 million and will provide increased leverage and financial flexibility headroom at the current ratings. Following the refinancing and as a result of continued growth in profits we project FFO adjusted gross leverage will reduce to 6.2x for the financial year to July 2018 (from 6.7x at FYE17) and decrease towards 6.0x thereafter. The new capital structure will result in lower interest costs leading to improved coverage metrics with FFO fixed charge coverage trending towards 2.5x by FY20 from 1.9x at FY17. Stable Operating Performance: Afflelou's healthy results continued in FY17, with network sales, group revenue and EBITDA all exceeding our previous expectations. This was driven by growth in all regions, with strong like-for-like (lfl) increase in France. Cooperation with major care networks is continuing to bear fruit, which is reflected in higher network activity and increased earnings. Such operating developments reflect a successful implementation of Afflelou's business strategy and adaptation of the company to an evolving trading environment. Strong Cash Flow Generation: Fitch projects Afflelou will generate consistently positive and growing free cash flows (FCF) with FCF margins improving from around 6% in FY17 towards 10% in FY19-20. Moreover, Afflelou's cash conversion as measured by FCF/EBITDA (as defined by Fitch) is fairly strong relative to the medians for European leveraged retail peers in the 'B' rating category. This assumption is supported by steadily expanding EBITDA, which is driven by higher network activity, coupled with lower cash interest expenses following the refinancing. In addition, Afflelou's efforts to reduce the number of directly-owned stores through sale or closure should improve cash flows and credit metrics, underpinning the asset-light nature of Afflelou's business model as a franchisor model. Small-scale acquisitions are embedded in the current ratings, and they can be comfortably funded by internal cash. DOS Reduction Viewed Positively: Management's efforts to reduce the group's portfolio of directly owned stores (DOS) in the medium term could provide some upside to the current ratings if successfully implemented as it would result in lower rental expenses and capital expenditure and have an immediate positive impact on EBITDA, FCF generation and adjusted credit metrics. We do not include a material reduction in DOS in our current rating case given the execution risks associated with disposing the shops as well as the group's recent track record of trying to reduce the estate. However, should management successfully implement this plan, it would be positive for the ratings. DERIVATION SUMMARY Afflelou's Long-Term IDR of 'B'/Stable reflects a symbiotic business model with healthcare and retail components. The business benefits from a favourable reimbursement policy for eye care in France. This provides for greater operational stability compared with conventional retailers, who face less predictable consumer behaviour, and as a result, are exposed to higher sales and earnings uncertainties. Consequently, Afflelou's operational resilience tolerates slightly higher financial risk compared with pure retail peers such as Mobilux 2 SAS (B/Stable), New Look Retail Group Ltd (CCC) and Financiere IKKS S.A.S. (CCC). Compared with healthcare peers such as Synlab Unsecured Bondco PLC (B/Stable), Afflelou is rated at the same level despite a slightly lower leverage due to a retail element in its business model. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Afflelou include: - Revenue growth of 3% in FY18 decelerating gradually thereafter, marking the ongoing transition to closer cooperation with care networks; - EBITDA margin improving towards 21.4% by FY20 from 20.6% in FY17 driven by the top line and product mix; - Trade working capital outflow of EUR6 million per annum; - One-off payment of EUR6 million to management included in FY18; - Capex remaining stable at EUR11 million per annum; - Small bolt-on acquisitions annually offset by some asset or store disposals. RECOVERY ASSUMPTIONS We have used the going concern approach given Afflelou's asset light business model. The EBITDA discount of 20% applied to FY EBITDA of EUR77 million leading to post-restructuring EBITDA of around EUR 60 million. At this level of EBITDA Afflelou's internal cash generation would be negative, with a capital structure considered as largely unsustainable in such hypothetical scenario with FFO adjusted leverage of 8.0x. We assume the company will retain access to capital leases, the cost of which is estimated at EUR0.25 million, which we have deducted from the distressed EBITDA and consequently excluded from the creditor mass. Using a distressed Enterprise Value (EV)/EBITDA multiple of 5.5x we arrive at the post-restructuring EV of EUR336 million. After distributing 10% of this value for administrative claims, the new super senior RCF, which we assume will be fully drawn in a distress scenario, is estimated to recover up to 90% of the face value, capped by the French jurisdiction in accordance with Fitch's country-specific treatment of recovery ratings. The senior secured note holder would be able to recover 64%, implying a one notch uplift from the IDR, or 'B+'/RR3. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Consistently improving EBITDA as a result of increased network activity and no negative impact from regulatory changes; -FCF margin of at least 5% on a sustained basis; -FFO adjusted gross leverage moving sustainably towards 5.5x, and - FFO Fixed Charge Cover improving towards 2.5x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Deterioration of EBITDA and FCF margins as a result of continued weak network activity, impact of regulatory changes, adverse supplier or product mix changes or material increase in the DOS segment; -FFO adjusted gross leverage above 7.0x with no evidence of deleveraging, for example because of operating underperformance or aggressively debt-funded acquisition activity; -Unsuccessful integration of new acquisitions, and -FFO Fixed Charge Cover of 1.8x or lower. LIQUIDITY Comfortable Liquidity: Fitch projects Afflelou will generate comfortable free cash flow of EUR22 million in FYE July 2018 followed by EUR40 million per year thereafter, supported by strong network performance, the impact of the national care networks and evolving product mix. This strong internal liquidity should comfortably accommodate small scale business additions. We project the super senior revolving credit facility (RCF) of EUR30 million committed until April 2022, will remain undrawn until maturity. Contact: Principal Analyst Patrick Durcan Analyst +44 20 3530 1298 Supervisory Analyst Elena Stock Director +49 69 76 80 76 135 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 D-60311 Frankfurt am Main Germany Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Summary of Financial Statement Adjustments: - Operating leases capitalised by 8.0x for lease-adjusted leverage metrics; - Shareholder convertible bond treated as equity. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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