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Fitch Upgrades Solocal After Restructuring to 'B-'/Negative
March 29, 2017 / 3:39 PM / 6 months ago

Fitch Upgrades Solocal After Restructuring to 'B-'/Negative

(The following statement was released by the rating agency) LONDON, March 29 (Fitch) Fitch has upgraded Solocal Group's Long-Term Issuer Default Rating to' B-', and assigned a senior secured bond rating of 'B'/'RR3'. The Outlook is revised to Negative. The conclusion of the financial restructuring represents a restricted default under Fitch's methodology. The Long-Term Issuer Default Rating of 'B-' reflects the new financing structure and associated improved financial flexibility of the business that will allow it to invest for growth in digital markets. The Negative Outlook reflects the execution risk in the implementation of management's growth strategy Conquer 2018, as well as the competitive nature of the markets the group operates in. This rating action relies to a large extent on publicly available information. Fitch will update the ratings following the upcoming management meeting. KEY RATING DRIVERS Financial Restructuring Plan Complete: The debt restructuring concluded on 14 March 2017. As a result, financial debt has been reduced to approximately EUR398 million, representing EUR397.8 million of re-instated bonds and only small finance leases. Pro forma net debt as at 31 December 2016 was reported at EUR344 million. Considering the five-year tenor of the bonds and an expectation of a recurring free cash-flow margin of above 5% (after interest payments), Fitch takes the view that management has the means at its disposal to manage future refinancing risk. The agency would expect some voluntary debt repayments over the life of the bonds. Implementation of Conquer 2018: Solocal Group now has more financial flexibility to make investments in the internet segment. Management intends to substantially refocus and optimise the sales process, launch new product lines, emphasise mobile growth and focus on audience monetisation. As the addressable market continues to grow , Solocal Group will have to execute on achieving better brand recognition, driving audience growth and deliver compelling value to customers, if the group wants to be a leading player in digital media and advertising over the longer term. . Viable Business Potential: Many of Solocal's businesses are challenged by high levels of competition. The group says it ranks seventh in terms of internet audience reach in France, and there are many competing web construction businesses targeting SMEs that also offer competing transactional tools. Typically, audience monetisation is materially better for the top two or three players in digital media. As a result, Solocal Group will need to carefully select opportunities where it can establish a market-leading position to achieve higher monetisation. Other avenues for earnings growth include partnerships and cross-selling of the product range to its large existing customer base. DERIVATION SUMMARY Solocal Group offers a broad range of services to enhance customers' visibility on the web. This starts with creating and maintaining websites and their content, achieving better rankings on search engines (increasingly with geographic focus), placing advertising links with the target audience and offering transactional tools to complete bookings and payments. The group generates traffic from its own media platforms, including PagesJanues and Mappy, as well as through partnerships with international players, including Google and Apple. Solocal's operations demonstrate weaker monetisation of audience reach and structurally higher costs than market-leading online classified businesses such as rightmove, AutoTrader or Schipsted. We consider that the current business profile limits Solocal Group to a 'B' category rating, while the online classified businesses with number one or two positions in their local markets can achieve 'BB' category ratings, assuming in both cases very little debt funding. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - 2017 EBITDA of around EUR205 million and mid-single digit growth in 2018; - effective tax rate of 45% for purposes of the income statement, of which 85% was assumed to translate into cash tax; - restructuring costs that may be qualified as recurring and utilisation of provisions of around EUR15 million per annum; - these items are included in "Other Items Before FFO" in Fitch's presentation of the cash-flow statement; - working-capital outflows of EUR5-10 million per annum; - EUR75 million of capital expenditure per annum over the medium-term; - EUR37m of non-operating/non-recurring cash-flow expenditure related to the financial restructuring in 2017, reflecting the group's communication regarding pro forma net debt as at end-December 2016 of EUR344m, implying a reduction of cash balances of EUR37 million; - use of free cash flow to i) build-up a cash balance that is under all circumstances sufficient to safeguard liquidity, ii) pursue additional capital expenditure/growth opportunities (mostly of an organic nature); and iii) repay some of the EUR397m of re-instated bonds; - no dividends over the rating horizon. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action / Stabilisation of the Outlook - High single-digit growth of digital revenues and good cost control, leading to EBITDA-margin at or above 30% in the digital business over the medium-term, ie two to three years - Monetisation of ancillary services supporting EBITDA margin - Broader base of products that have a visible value-added when compared to the competition and rely on less labour-intensive marketing processes - Achieving top-three market position in segments with meaningful market volume - Voluntary debt repayments that mitigate future refinancing risk Future Developments That May, Individually or Collectively, Lead to Negative Rating Action / Downgrade - Lack of growth momentum in the digital business over the next 24 months - Free cash-flow margin falling below 5% on a sustained basis - Failure to maintain cost discipline across the organisation - Weakening liquidity either due to operational issues or corporate activity - Failure to make voluntary debt repayments over the five-year tenor of the reinstated bonds LIQUIDITY Adequate Liquidity: Following completion of the debt restructuring the group holds around EUR60 million of cash and is expected to generate positive free cash flow on an ongoing basis. FULL LIST OF RATING ACTIONS Solocal Group -- Long-Term IDR upgraded to B- from RD, Outlook Negative; -- Assigned a senior secured bond rating of B/RR3; PagesJaunes Finance & Co. S.C.A. -- The senior secured bond rating is withdrawn; following the debt restructuring no bonds remain outstanding at PagesJaunes Finance & Co. S.C.A.; Contact: Principal Analyst Michal Svantner Associate Director +44 20 3530 1691 Supervisory Analyst Oliver Schuh Director +44 20 3530 1263 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Committee Chairperson Edward Eyerman Managing Director +44 20 3530 1359 Summary of Financial Statement Adjustments - Operating leases were capitalised at 8x in line with French jurisdiction - Non-recurring items were stripped out in order to arrive at Fitch Operating EBITDA - On the cash-flow statement non-recurring items were moved out of Cash Flow from Operations (Fitch defined) and into Total Non-Operating/Non-Recurring Cash Flow, essentially requalifying them from operating to investment activity - The debt was recorded at notional value, ignoring the issue premium. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. 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