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Fitch Assigns Afflelou 'B(EXP)' IDR; Proposed Senior Secured Notes 'BB-(EXP)'
April 14, 2014 / 3:10 PM / 4 years ago

Fitch Assigns Afflelou 'B(EXP)' IDR; Proposed Senior Secured Notes 'BB-(EXP)'

(The following statement was released by the rating agency) LONDON, April 14 (Fitch) Fitch Ratings has assigned Lion/Seneca France 2 S.A.S. (Afflelou) an expected Long-term foreign currency Issuer Default Rating (IDR) of 'B(EXP)' with a Stable Outlook. Fitch has also assigned expected ratings of 'BB-(EXP)'/RR2' to 3AB Optique Developpement S.A.S.'s proposed EUR365m senior secured notes due 2019 and revolving facility and 'CCC+(EXP)'/RR6' to Lion/Seneca France 2 S.A.S.'s proposed EUR75m senior notes due 2019. Final ratings are subject to a review of the final documentation materially conforming to information already received by Fitch. Afflelou's 'B(EXP)' expected IDR is based on the group's leading position in the optical retail market, which is characterised by positive underlying drivers with a low capital intensity, and a cash generative financial profile. Afflelou's dual business model (both franchisor and operator of own stores) with a strong focus on the franchisor business supports the ratings, despite the group's reliance on the French market. The strong cash flow generation derived from its business model partly offsets the aggressive capital structure with close to 7.0x gross funds from operations (FFO) adjusted leverage at closing of the planned refinancing. Failure to conduct the planned refinancing would result in the withdrawal of the ratings. KEY RATING DRIVERS Third-largest French Player Afflelou benefits from a strong market share of 11% in France in a relatively fragmented market. Its robust market position is evidenced by strong brand recognition supported by large advertising spend, and innovation capabilities with regular launches of new products and concepts. The on-going price war on the French market led management to extend the brand strategy and create the low cost Claro concept. Pressure on Profitability to Ease Fitch notes the erosion in group EBITDA margins from 38.4% in FY10 to 21.7% in FY13. However, such decline in margins was driven by the change in mix between franchised and directly operated stores; this has been exacerbated by the on-going price competitiveness. In Fitch's view, despite the benefits of having the Claro banner, there could be a cannibalisation effect and a risk of margin dilution. These risks are captured in the expected rating. However, Fitch expects margins to stabilise within the next two years. Positive Underlying Market Drivers The French optical retail market represented 76% of Afflelou's 1H14 revenues and is the largest in Europe at approximately EUR5.5bn in 2013. It benefits from positive underlying drivers such as an ageing population, rising exposure to digital displays, technological progress, high reimbursement levels for glasses and increasing health awareness leading to greater resilience to economic downturns. The Spanish market benefits from the same demographic drivers, but is less favourable as it has contracted in the past five years due to a different product segmentation skewed towards sunglasses. Limited Impact From Pressure On Reimbursement Although the French optical retail market benefits from an attractive reimbursement policy, it could suffer from some regulatory changes from as soon as 2015 that would implement price floors as well as ceilings. In Fitch's view, this should not materially affect the company as public reimbursement represents only 5% of the total purchase, and the ceiling currently negotiated for private insurance is approximately the same as the company's average customer spend. Late Mover to Internet Afflelou was less reactive than its competitors regarding e-commerce strategy and only launched a website in March 2014, with a limited product offering. In the optical industry in France, the eCommerce distribution channel is not extensively developed at the moment. However, Fitch believes that recent legislation in the country should drive the growth of this new distribution channel and allow pure players with a low cost base to differentiate themselves in a market with high growth potential. Neutral Effect From On-going Refinancing The planned debt refinancing will be relatively neutral with average maturities being brought forward slightly, and total debt being broadly the same. The high bank fees incurred should be partly offset by the fact that the debt structure will be 100% cash pay compared with the former bank loan structure comprising a growing payment in kind (PIK) coupon for the mezzanine loan facility. Manageable Credit Metrics Following the closing of the on-going refinancing, Fitch expects credit metrics to reach close to 7x gross FFO adjusted leverage. However, the company's franchisor business model implies low working capital and capital expenditures requirements allowing healthy cash flow generation that may be used for acquisitions if opportunities arise. Along with the bullet debt maturity profile after the refinancing, Fitch expects credit metrics to slowly improve to 6.4x gross FFO adjusted leverage in FY17. Superior Recoveries For Senior Secured Noteholders We consider that the distressed valuation of the company would be maximised in a going concern scenario as the business is relatively asset-light (franchisor business model). In addition, we believe that should Afflelou default, this would not be the result of a broken business model but rather due to an adverse regulatory change (reimbursement policy) or unmanageable financial leverage. We have used a discount of 20% to the most recent LTM EBITDA of EUR77m reflecting neutral free cash flow (FCF) at this level of discounted EBITDA in FY14, and 5.5x distressed EV/EBITDA multiple in line with 'B' category peers in the sector. Our analysis results in superior recovery prospects for both the super senior RCF and senior secured notes at 'RR2' (capped due to the French jurisdiction) and very limited recovery prospects for the senior notes at 'RR6'. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: - Stable to improving EBITDA margin above 22%. - FFO gross adjusted leverage below 5x. - FFO fixed charge cover of 2.5x or higher. Negative: Future developments that could lead to negative rating action include: - FFO gross adjusted leverage above 7x or evidence of no deleveraging from closing, for example because of operating underperformance or ongoing acquisition activity. - Any sign that internet is becoming a serious threat reflecting in negative like-for-like sales growth on a sustainable basis. - Unsuccessful integration of new material acquisition/s. - EBITDA margin consistently below 21%. - FFO fixed charge cover of 1.8x or below. - FCF margin below 8%. All these ratios are based on Fitch calculated metrics. Contact: Principal Analyst Ilana Elbim Analyst +44 20 3530 1644 Supervisory Analyst Cecile Durand-Agbo Senior Director +44 20 3530 1220 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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. Applicable criteria, 'Corporate Rating Methodology', dated 5 August 2013, are available at Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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