December 16, 2015 / 12:36 PM / 4 years ago

Fitch Affirms Casino Guichard-Perrachon at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON/PARIS, December 16 (Fitch) Fitch Ratings has affirmed Casino Guichard-Perrachon SA's (Casino) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-' and its Short-term IDR at 'F3'. The 'BBB-'/'F3' senior unsecured rating also applies to all senior unsecured debt issued by Casino Finance SA (Casino's fully-owned financial subsidiary) that is guaranteed by Casino. Fitch has also affirmed Casino's EUR600m perpetual preferred constant maturity swap securities and EUR750m deeply subordinated fixed to reset rate (DS) notes at 'BB'. The Outlook on the Long-term IDR is Stable. The 'BBB-' IDR continues to reflect Casino's strong business profile, supported by a large scale, leading market positions and diversified revenue streams by geography, sales channels and store formats. Fitch now assesses the group's financial profile through proportionately consolidated credit metrics, as opposed to full consolidation previously. On that basis, the group's financial profile is not in line with a 'BBB-' IDR due to high legacy leverage and important group capital structure imbalances. However, we expect the latter to improve strongly over 2016-2017. Factoring in management's public commitment to an investment grade rating and limited execution risk in the announced 2016 EUR2bn+ deleveraging plan, we forecast proportionally consolidated funds from operations (FFO) net leverage to decrease towards 4.0x by end-2017, a level consistent with a 'BBB-' rating. In addition to the deleveraging plan a recovery in French profits and cash flows should more than offset a diminished contribution from Brazil and thus support the correction of the current capital structure imbalance. The Stable Outlook reflects Fitch's view of Casino's operating performance resilience and the material size of the 2016 deleveraging plan. KEY RATING DRIVERS Ongoing French Turnaround Fitch expects Casino France's profits and cash flows to significantly increase from 2016. Like-for-like sales growth should be driven by the group's successful price repositioning, completed network refurbishment and a mildly improving trading environment characterised by more positive consumer confidence and abating price deflation. While Fitch continues to expect intense competitive pressure in the French market, profitability should benefit from positive operating leverage, the diminishing effect of price cuts, the purchase partnerships recently agreed with Intermarche and DIA and cost-saving measures implemented in 2H15. These should enable French EBITDA to reach at least EUR1bn in 2016. We expect further working capital optimisation to have been achieved in 2015, and more generally increased EBITDA and capex to reduce to sustainable levels to support cash flows in the next three years. Diminished Contribution from Brazil Fitch's recent affirmation of Brazilian subsidiary Grupo Pao de Acucar's (GPA or Companhia Brasileira de Distribuicao (CBD)) National 'AA+(bra)' rating with Stable Outlook reflects our expectation that the subsidiary will be able to endure the economic downturn through a near-term stabilisation of its operating performance and without experiencing a meaningful deterioration in its financial profile. However, this will not prevent GPA's profit and cash contribution to Casino group from diminishing over the medium term due to subdued operating performance and unfavourable BRL/EUR exchange rates. Enhanced Diversification; Complex Group Structure The acquisition of strategic stakes in various companies by the French parent company over the past two decades (Big C, GPA, Monoprix) significantly enhances the group's diversification by geography and store format. However, as only the French entities and Big C Vietnam are fully owned, Casino's intricate group structure involves significant minority interests, which complicates the parent company's access to cash, implying significant dividend leakage. As the French parent company can exercise control of its foreign subsidiaries' operations and dividend policy through a majority of voting rights, we therefore now assess the group's financial profile through proportionally-consolidated credit metrics. Important Capital Structure Imbalances The complex group organisation has resulted in an imbalance within its capital structure, increasing Casino's financial risk profile. At end-2014 close to 80% of consolidated gross debt was located in France, while more than 65% of the readily available cash was located in its foreign subsidiaries. This has resulted in a sharp divergence between the parent company's (including 100%-owned entities) leverage and the group's proportionally consolidated leverage. The mismatch between cash flow and liabilities is relevant in that the majority of the group's debt is denominated in euros, while a significant portion of the cash is generated in more volatile currencies such as BRL. We view positively the July 2015 reorganisation of the Latin American assets as a means to reducing the capital structure imbalances. The exercise resulted in a EUR1.7bn reduction in parent company's net debt. However, it has resulted in further dilution of Casino's economic interest in its Brazilian entity to 32.8% currently (end-2014: 41.3%). This means the parent company's access to cash at subsidiary level is more by way of assets or share realisations than recurrent dividend upstreaming. High Legacy Leverage Casino's high 2014 proportionally-consolidated FFO adjusted net leverage of 5.9x (before the impact of Latam assets reorganisation) reflects the group's acquisitive stance over the past years and capital structure imbalances. This lack of balance is exacerbated by downward pressure on profitability in France as well as management's strong investments to support the turnaround of its French operations. Significant Deleveraging Plan Fitch expects Casino's financial structure to strongly improve by end-2017, leading to a financial profile more consistent with a 'BBB-' rating. This would be reflected in both proportionally consolidated adjusted FFO net leverage falling towards 4.0x by end-2017 and a convergence in leverage ratios at proportionally consolidated group and parent company (including 100%-owned entities) level, signalling rebalancing of debt and cash within the structure. Taking into account a conservative financial policy based on limited M&A and dividend increases, Fitch expects Casino's deleveraging process to be supported by the July 2015 Latam asset restructuring (proportionally consolidated adjusted FFO net leverage to decline to 5.5x at end-2015), the announced 2016 EUR2bn+ deleveraging plan and the expected uplift in French FFO and cash generation. Fitch sees limited execution risk in the EUR2bn+ deleveraging plan due to the attractiveness of the assets to be disposed and management's commitment to reach its objectives. The ratio convergence reflects Fitch's expectation that the deleveraging plan will primarily impact net debt at the parent company level and that France will improve its contribution to consolidated FFO. Adequate Financial Flexibility Casino's financial flexibility is consistent with a 'BBB-' IDR. The group enjoys well-spread debt maturities and comfortable liquidity, including at the parent company level (including 100%-owned entities). Furthermore, Fitch projects Casino's fixed charge cover ratio to be at or above 2.0x from 2016 (versus 1.8x in 2014) both at the parent company level (including 100%-owned entities) and on a proportionally consolidated basis. This is due to a combination of debt repayments at the parent company level and higher cash flow generation from the 100%-owned French entities. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Casino include: -Decrease in sales in 2015 and 2016 due to weaker contribution from GPA resulting from deterioration in operating performance and negative FX impact -Drop in EBIT margin to 3.3% in 2015 (2014: 4.6%), driven by lagging price cut effect in France and Brazilian deterioration; back above 4% from 2017 -Capex down to EUR1.4bn in 2015 (3% of sales), driven by a strong reduction in both France and Brazil, and at maintenance levels thereafter (2.3%-2.5% of sales) -Free cash flow (FCF) at 1% of sales, supported by working capital optimisation measures, lower capex and a limited increase in dividends -EUR2bn cash proceeds from deleveraging plan in 2016, acquisition spending limited to EUR100m p.a. in 2017 and 2018 RATING SENSITIVITIES Positive: Future developments that could lead to a positive rating action include: -Group EBIT margin consistently above 4.5%, reflecting sustainable turnaround in France and recovery in Brazil -Proportionally-consolidated fixed charge cover above 2.5x -Proportionally-consolidated adjusted FFO net leverage below 3.5x on a sustained basis -Maintenance of a meaningful convergence between proportionally-consolidated and parent company's (including 100%-owned French entities) leverage metrics, reflecting adequate cash and debt match across the group Negative: Future developments that could lead to a negative rating action include: -A sharp contraction in both core French and group's like-for-like revenue growth and EBITDA -Proportionally-consolidated fixed charge cover consistently below 2.0x -Proportionally-consolidated adjusted FFO net leverage consistently above 4.0x -Lack of meaningful convergence between proportionally consolidated and parent company's (including 100%-owned French entities) leverage metrics, reflecting continuing major capital structure imbalances LIQUIDITY At end-2014 Casino group had EUR7bn readily available cash on balance sheet and EUR4.2bn available and undrawn committed lines of credit, which also represent back-up lines for the group's commercial paper programme. The parent company (including 100%-owned French entities) also benefits from adequate liquidity. At end-2014 its EUR2,385m short-term debt was well covered by EUR3,584m available and committed credit lines. Liquidity at the holding company level has been further boosted by the proceeds of the Latam assets reorganisation offsetting weak French operations' FCF relative to debt repayments in 2015. Fitch calculates and monitors Casino's leverage ratio on a proportionally consolidated FFO net leverage basis. Fitch's adjusted net debt encompasses all of the group's debt-like obligations. These include Casino's EUR600m hybrid securities (0% equity treatment under Fitch's hybrid methodology), 50% of Casino's EUR750m reset rate notes (50% equity credit under Fitch's hybrid methodology), theoretical market exposure related to the total return swaps (TRS) on 3% of GPA's capital and on 2.5% of Big C Thailand's capital, operating leases (multiple varies according to country of operations and rent type (fixed vs. variable) as per Fitch's methodology) and various put options. Our net debt calculation also excludes cash that we deem not readily available for debt service (EUR315m in 2014). Contact: Principal Analyst Anne Porte Associate Director +33 144 29 91 36 Supervisory Analyst Jean-Pierre Husband Director +44 203 530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 203 530 1021 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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. Marc Ladreit de Lacharriere serves on the board of Casino. Mr. de Lacharriere is the controlling shareholder of Fimalac, S.A., which owns a 20% equity interest in Fitch. Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=996825 Solicitation Status here Endorsement Policy here ail=31 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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