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TEXT-S&P revises Gruppo Espresso outlook to negative
September 13, 2012 / 5:56 PM / 5 years ago

TEXT-S&P revises Gruppo Espresso outlook to negative

(The following statement was released by the rating agency)

Overview
     -- We have lowered our base-case projections for the revenues and 
earnings of Italy-based newspaper and magazine publisher Gruppo Espresso and 
for the Italian advertising market over the next 12 to 18 months. 
     -- We anticipate Gruppo Espresso's credit metrics will weaken 
increasingly over the next 12 to 18 months, in line with our view of continued 
deterioration in Italy's economy during the period. 
     -- We are revising our outlook to negative from stable and affirming our 
'BB' long-term rating on Gruppo Espresso.
     -- The negative outlook reflects our view that the tough macroeconomic 
conditions in Italy could prompt weakening in Gruppo Espresso's earnings and 
credit metrics over the next 12 to 18 months.

Rating Action
On Sept. 13, 2012, Standard & Poor's Ratings Services revised its outlook on 
Italy-based newspaper and magazine publisher Gruppo Editoriale L'Espresso SpA 
(Gruppo Espresso) to negative from stable. At the same time, we affirmed our 
'BB' long-term corporate credit rating on Gruppo Espresso.

We also affirmed our 'BB' issue rating on Gruppo Espresso's senior unsecured 
debt. The recovery rating on the senior unsecured debt is unchanged at '3', 
indicating our expectation of meaningful (50%-70%) recovery in the event of a 
payment default.

Rationale
The rating action reflects our view that Italy's deteriorating economy is 
likely to result in a substantially weaker-than-anticipated Italian 
advertising market over the coming 12 to 18 months. As a result, we have cut 
our base-case projections for Gruppo Espresso's operating performance and its 
credit metrics over the period. In particular, we now think the group's 
adjusted debt leverage could reach or exceed 3.5x at in 2012 and 2013, which 
we view as high for the current ratings. 

In addition, while not central to our base-case scenario,the timing of a 
possible final court decision on the recent tax ruling opposing Gruppo 
Espresso and the Italian tax authorities could coincide with the upcoming 
refinancing of its EUR228 million of senior unsecured debt, although we 
recognize it's extremely difficult to make a reasonable estimate of the 
timing. From the group's perspective, a potential negative ruling could 
increase its financial risks. At this stage, though, we haven't factored such 
risks into the current ratings. 

We now anticipate Italy's advertising market will post a decline in the low 
double digits in 2012, following further downward revisions in our base-case 
scenario. We base our projection on the 9.5% decline in advertising spending 
over the first half of this year and our revised forecast for a 2.1% GDP 
contraction in Italy in 2012 (see "The Curse Of The Three Ds: Triple 
Deleveraging Drags Europe Deeper Into Recession," published July 30, 2012, on 
RatingsDirect on the Global Credit Portal").

Although we expect Gruppo Espresso to outperform the market, we anticipate a 
high-single-digit drop in revenues and narrowing of the group EBITDA margin to 
around 14% in 2012. 
We remain cautions on the possible evolution of advertising spending in Italy 
beyond 2012, given the uncertain economic outlook and limited visibility on 
investments in advertising. Consequently, we think the advertising market will 
continue to weaken in 2013, although at a slower pace than in 2012. 

Under our base case, we expect Gruppo Espresso's ratio of adjusted debt to 
EBITDA (leverage) to stand at 3.5x in 2012 and to approach 4.0x in 2013, which 
we consider high for the rating category. 

We continue to assess Gruppo Espresso's financial risk profile as 
"significant." This reflects the cash-generative nature of the group's 
business and "adequate" liquidity, under our criteria, which relies on sizable 
cash-on-balance sheet to fund limited annual debt amortization. Our assessment 
does not factor in any cash outflow arising from the pending tax ruling over 
the next two years. Constraints to the rating are the absence of any long-term 
committed credit facilities and the 53.8% stake that holding company 
CIR-Compagnie Industriali Riunite SpA (CIR; BB/Stable/B) has in Gruppo 
Espresso. This ownership enables CIR to exercise significant influence on the 
group's major financial policy decisions. 

Our assessment of Gruppo Espresso's business risk profile as "fair" reflects 
exposure to the cyclical nature of the advertising sector, concentration of 
revenues in a single business franchise (Italian daily "la Repubblica"), and 
our belief that the group competes for advertising revenue within Italy's 
highly concentrated media industry. Support for the ratings primarily stems 
from the group's leading positions in the Italian national and local newspaper 
markets, of which Gruppo Espresso held an 18% share in 2011, and the group's 
ability to cross-sell its own content through its newspaper, magazine, radio, 
Internet, and TV assets.

Liquidity 
We assess Gruppo Espresso's liquidity as "adequate," according to our 
criteria. We expect that Gruppo Espresso's sources of liquidity, including 
cash and marketable securities, will exceed uses 1.2x or more in the next 12 
months, even if EBITDA declines 20%-30%.

Liquidity sources include Gruppo Espresso's existing cash balances, which 
stood at about EUR125 million on June 30, 2012, and our anticipation that the 
group will generate approximately EUR70 million of funds from operations (FFO) 
in 2012. However, we note that cash is the group's sole source of liquidity, 
given the absence of any committed bank facilities that could potentially 
provide immediate and increased liquidity and financial flexibility.

Liquidity uses for the next 12 months mainly include our assumptions of 
limited working capital needs, EUR25 million of average capital expenditure 
(capex). In the absence of a stated dividend policy we have assumed EUR15 
million of dividend payments, over the next 12 months, corresponding to a 40% 
payout ratio.

There are no significant debt maturities or debt amortization requirements 
before 2014, when the remaining EUR228 million of the senior unsecured bond 
becomes due. Gruppo Espresso reported modest short-term debt of about EUR22 
million on June 30, 2012, including about EUR11 million of principal 
amortization payments relating to the group's remaining EUR38 million of secured
bank facilities due in 2015. We understand that neither the senior facility 
nor the bonds are subject to financial covenants.

Recovery analysis
The issue rating on Gruppo Espresso's senior unsecured notes due 2014 is 'BB', 
in line with the corporate credit rating. The recovery rating on these notes 
is '3', indicating our expectation of meaningful (50%-70%) recovery for 
noteholders in the event of a payment default.

Our issue and recovery ratings are supported by our valuation of Gruppo 
Espresso as a going concern, given its leading market position in the Italian 
publishing market, highly recognized brands, and well-diversified customer 
base. On the other hand, the recovery prospects are limited by the unsecured 
nature of the debt. In addition, we consider that the center of main interests 
(COMI) would be Italy in an event of default. Italy is a jurisdiction that we 
view as not very favorable to creditors (see "Debt Recovery For Creditors And 
The Law Of Insolvency In Italy," published May 17, 2007).

We have revised our simulated default year to 2016 from 2014, assuming that 
Gruppo Espresso would be able to refinance its EUR228 million unsecured notes 
due in 2014 with a debt instrument of similar size. Our hypothetical default 
scenario assumes a deterioration in the group's credit metrics as a result of 
worsening macroeconomic conditions in Italy. Our assumptions also include some 
potential cash outflows after 2014 in the event of a negative outcome of the 
pending tax ruling. Under this scenario, we assume that these factors would 
trigger a payment default in 2016, at which point we forecast EBITDA to have 
declined by about 60% compared with the current level. 

We have calculated a stressed enterprise value of about EUR245 million at our 
simulated point of default, which translates into an enterprise value to 
EBITDA multiple of 5.0x.

After deducting priority liabilities, mainly comprising enforcement costs and 
a portion of the pension deficit, we estimate that recovery prospects for the 
unsecured noteholders would be in the 50%-70% range, which yields a recovery 
rating of '3'. 

We note that recovery prospects for the noteholders could be impaired if 
Gruppo Espresso were to raise a committed credit facility, given that this 
liquidity line would likely rank either pari passu with, or above, the 
unsecured notes in an event of default. Lastly, we consider that if the group 
was to default earlier, notably because of refinancing issues in 2014, the 
recovery prospects for the noteholders would still be in the 50%-70% range.

Outlook
The negative outlook reflects our view, under our base-case scenario mentioned 
above, that Gruppo Espresso's earnings and credit metrics could weaken over 
the next 12 to 18 months owing to challenging macroeconomic conditions in 
Italy. In particular, we believe the group's adjusted gross debt-to-EBITDA 
ratio could exceed 3.5x over the next 12 to 18 months. The negative outlook 
does not currently incorporate any potential adverse effects from the pending 
tax ruling. 

We could consider lowering the ratings on Gruppo Espresso if the group's 
operating performance falls significantly below our base-case scenario, 
leading to adjusted gross debt-to-EBITDA persistently above 3.5x. We could 
also consider a downgrade if the group's liquidity on hand, solely made of 
cash balances, falls below EUR100 million, as a result of operational setbacks 
or extraordinary cash outflows. An aggressive financial policy that results in 
significantly negative free operating cash flow could also trigger a negative 
rating action. 

We could consider revising the outlook to stable if the group's adjusted gross 
debt-to-EBITDA ratio decreases below 3.5x on a sustainable basis, on the back 
of a return to advertising spending growth in Italy, coupled with further cost 
savings.

Related Criteria And Research
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
     -- Key Credit Factors: Methodology And Assumptions On Risks In The 
Advertising Industry, Aug. 18, 2009

Ratings List
Ratings Affirmed, Outlook Action
                                      To                 From
Gruppo Editoriale L'Espresso SpA
 Corporate Credit Rating              BB/Negative/--     BB/Stable/--
  Senior Unsecured                    BB                 BB
   Recovery Rating                    3                  3

 (Caryn Trokie, New York Ratings Unit)

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