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Oct 23 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Casino Guichard-Perrachon SA's (Casino; BBB-/Stable) EUR750m deeply subordinated fixed to reset rate (DS) notes a final 'BB' rating. Fitch has applied a 50% equity credit treatment to this issue. The terms of the final documentation are in line with the information already reviewed when assigning the expected rating on this hybrid instrument.
Equity Treatment Given Equity-like Features
The securities qualify for 50% equity credit as they meet Fitch's criteria with regard to deep subordination, remaining effective maturity of at least five years and deferrable interest coupon payments at the option of the issuer. Fitch regards these as key equity-like characteristics, allowing Casino more financial flexibility. The terms and conditions of the notes also avoid mandatory repayments, and exclude covenant defaults as well as all other events of default, including cross default, that could trigger a general corporate default or liquidity need.
No Maturity Date
The notes are undated securities and have no specified maturity date. The issuer first has the option to redeem the notes on the first reset date.
Cumulative Coupon Limits Equity Treatment
The coupon payments are cumulative and incur interest where overdue by more than one year. The company will be obliged to make a mandatory settlement of interest arrears payments under certain circumstances, including following the payment of a dividend. This is a feature similar to debt-like securities and reduces the company's financial flexibility. Fitch has therefore only applied equity treatment of 50% of the notes.
Rating Reflects Deep Subordination
The notes have been notched down by two levels from Casino's IDR given their deep subordination and, consequently, lower recovery prospects in a liquidation or bankruptcy scenario relative to senior obligations. The notes rank senior only to the claims of equity shareholders.
Strengthening Business Model
In 2013, Casino gained full control of Monoprix in France and GPA in Brazil following the agreement reached with Abilio Diniz on 6 September. The full integration of Monoprix from Q213 and the full consolidation of GPA into its accounts in 2013 strengthen the group's business profile in terms of format and geographic diversification, as well as sales growth prospects and profit margin resilience.
Growing Exposure to Emerging Markets
Over the past three years, Casino's acquisitions have enlarged its international operations, including GPA in Brazil and Carrefour stores in Thailand. These significantly increase its exposure to markets with favourable underlying growth trends, although they also expose the group to country risk in the markets where it operates. Fitch expects international operations to represent more than 60% and 73% of Casino's 2013 revenues and EBIT compared with 38% and 41%, respectively, in 2010.
Challenging French Economy
Key challenges facing Casino relate to a soft consumer environment in France, which negatively affects its larger formats (hyper- and supermarkets). Since 2012, the group has been cutting prices and adjusting its product offer in response to anaemic consumer demand and intense competition from other large food retailers. Any meaningful positive impact from these initiatives on hyper- and supermarket sales and profit margins has yet to be seen despite the positive momentum seen in Q313.
Free Cash Flow to Improve
Fitch expects Casino to benefit from Monoprix's and GPA's full integration in terms of cash flow generation as they are more profitable and cash-generative than Casino. While remaining low as a percentage of sales, Fitch expects FCF to strengthen beyond EUR200m in 2013 and EUR300m in 2015.
Rating Headroom to Improve
From a financial perspective, rating headroom is currently limited at the 'BBB-' rating. Casino's lease-adjusted net funds from operations (FFO) leverage peaked at 4.5x in 2012, while the FFO fixed charge cover was weak at 2.3x (both ratios with GPA proportionally consolidated: lease-adjusted net debt/EBITDAR equivalent is 3.9x). The group should regain reasonable headroom under its rating in the next two years, due to the 100% consolidation of GPA and Monoprix from 2013 onwards. Casino should also benefit from further asset disposals in 2013 and 2014. The scale of debt reduction that can be achieved through these disposals will therefore be considered a supporting factor for the ratings.
Positive: Future developments that could lead to positive rating actions include:
- Maintaining positive like-for-like growth
- FFO fixed charge cover above 3.0x
- Lease-adjusted FFO net leverage (adjusted for debt-like obligations) below 3.5x on a sustainable basis (equivalent to 3.0x lease-adjusted net debt/EBITDAR)
Negative: Future developments that could lead to negative rating action include:
- Sharp contraction in group's like-for-like sales growth and EBIT
- FFO fixed charge cover below 2.0x
- Lease-adjusted FFO net leverage (adjusted for debt-like obligations) above 4.2x (equivalent to 3.7x lease-adjusted debt/EBITDAR) on a sustained basis