December 20, 2017 / 10:13 AM / 6 months ago

Fitch Assigns Picard's Senior Secured FRNs Final 'B+'/'RR3' on Refinancing

(The following statement was released by the rating agency) PARIS, December 20 (Fitch) Fitch Ratings has assigned Picard Groupe SAS's six-year EUR1.19 billion senior secured floating-rate notes (FRNs) a final rating of 'B+'/'RR3' following the completion of the group's refinancing and dividend recap. It has also assigned a 'BB-'/'RR2' final rating to Picard Groupe SAS's 5.5-year EUR30 million revolving credit facility (RCF), and a final rating of 'CCC+'/'RR6' rating to Picard Bondco SA's (Picard) seven-year EUR310 million senior notes. Picard's Issuer Default Rating (IDR) of 'B' is not impacted by the refinancing and remains on Stable Outlook. KEY RATING DRIVERS Aggressive Financial Policy: Fitch views the sponsors' (Lion Capital Partners and Aryzta AG) financial policy as aggressive. The refinancing entails an increase in cash-pay debt by 25% up to EUR1.5 billion. Together with existing cash the debt issuance proceeds were used to repay the group's EUR1.2 billion existing senior secured FRNs and senior notes, Picard PIKco SA's EUR232 million PIK notes and to fund an upstream dividend of EUR110 million. As a consequence we expect funds from operations (FFO)-adjusted net leverage to increase to 9.0x at FYE18 (financial year ending March 2018) from 7.2x at FYE17 and to remain above 7.5x over the next three years, a level comparable to 'CCC' rated peers. High Refinancing Risks: Although we believe that Picard's deleveraging pace should not be significantly affected by the new capital structure, due to a strong business model and healthy cash flow generation capacity, the higher debt levels as a result of re-leveraging will result in higher refinancing risk. This acts as a key constraint on the IDR, and results in tight headroom under the 'B' rating. Any under-performance to Fitch's rating case would lead to negative rating action. Robust Business Model: Picard's sales and profitability have proven resilient to adverse conditions, such as the horse-meat scandal in 2013 and the current frozen food market decline. Its low but steady growth reflects the high competitiveness of its products and services offering. It is by far the leader in its segment and among the most widely recognised retail brands. As most of its sales are generated by own-branded products, the group's profit margins are higher than typical food retailers'. High profitability, combined with limited working-capital and capex needs, enable it to consistently generate positive free cash flow (FCF), distinguishing it from its retail peers. Strengthening Profitability: Over FY18-FY21 Fitch expects EBITDA margin to be sustainable at 14.3% (FY17: 14.5%). Strengthening like-for-like sales growth should result in positive operating leverage and we also expect falling foreign expansion costs as a percentage of sales. Initiatives to enhance product offering and services support like-for-like sales. They include improved customer relationship management through a newly established loyalty programme, in-store snack bars, selected wine offers and a higher frequency of innovation. Management also focuses on developing models that are quickly profitable in foreign countries, such as in Japan and Switzerland. Slow Geographic Diversification: Lack of geographic diversification is a rating constraint as it lowers the group's potential for growth. Expansion in Switzerland and Japan looks promising and operations there are already profitable, but we do not expect any significant contribution to overall group EBITDA over the next five years. On the other hand, in countries which are not yet profitable for Picard, Fitch expects limited losses due to management's cautious approach. It has some track record in adapting foreign operations' business models should they not perform well. Examples include partnership with a local player in Italy and the development of a corner-in-shop model in Sweden in parallel to the own-store model. Positive FCF: Fitch expects annual FCF to average 4.4% of sales during FY18-FY21, which is higher than under the previous debt structure (FY17: 3%). Fitch expects Picard to pay lower interest costs under the new capital structure despite a higher amount of cash-pay debt, due to favourable market conditions. In addition, low cash-flow volatility continues to reflect the group's resilient gross profit margin and flexibility to scale back expansion capex (approximately 20% of total capex), without eroding EBITDA and FFO. Good Financial Flexibility: We forecast Picard's FFO fixed charge cover to be stable at 1.9x over the next four years, a level comparable to 'BB' rated food retailers. It reflects the group's high profitability. Financial flexibility should also be supported by Picard's high cash generation capacity, resulting in comfortable liquidity. At the 'B' rating level this somewhat compensates for a financial structure comparable to 'CCC' rated peers. KEY REVOVERY ASSUMPTIONS: - The recovery analysis assumes that Picard would be considered a going concern in bankruptcy and that the group would be reorganised rather than liquidated. We have assumed a 10% administrative claim in the recovery analysis. - Picard's recovery analysis assumes a post-reorganisation EBITDA 25% below FY17 EBITDA of EUR202.3 million. At this level of EBITDA and after taking corrective measures into account, we would expect Picard to continue to generate slightly positive FCF but to have limited deleveraging capacity from a high level. - It also assumes a distressed multiple enterprise multiple (EV) of 6.0x, which is higher than food manufacturer peer Premier Foods PLC's (B/Negative) 5.0x. In our view Picard's higher multiple reflects the group's niche positioning and less vulnerable business profile as a retailer generating sales mostly through own-branded products. - Fitch generally assumes a fully drawn RCF in its recovery analyses since credit revolvers are usually tapped when companies are under distress. Therefore Fitch assumes Picard's EUR30 million super senior RCF will be fully drawn. Such assumptions result in high recovery prospects for the super senior RCF to be issued by Picard Groupe SAS, to which we have assigned a final rating of 'BB-'/'RR2' (71%-90% range), two notches above Picard's IDR. The recovery prospects are capped at 'RR2' due to most of the borrowing group's assets being in France. We also estimate above-average recovery prospects for the senior secured FRNs issued by Picard Groupe SAS, to which we have assigned a final rating of 'B+'/'RR3' (51%-70% range), one notch above Picard's IDR. Following the debt waterfall, Fitch has assigned the senior unsecured notes issued by Picard a final rating of 'CCC+'/'RR6', indicating recoveries in the 0%-10% range. DERIVATION SUMMARY Compared with food retail peers such as Carrefour SA (BBB+/Stable) or Casino Guichard-Perrachon SA (BB+/Stable), Picard is small, and has weak geographic diversification and high leverage. However, these weak aspects are offset by its strong competitive position as the leader in a niche market. Furthermore, its unique business model (food retailer selling mostly own-brand products) enables it to reach levels of profitability in line with food manufacturers such as Premier Foods PLC (B/Negative), and much higher than its immediate retail peers'. This supports its solid financial flexibility and liquidity. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Moderate like-for-like sales growth, driven by management's initiatives to support French like-for-like sales in a highly competitive environment, and cautious expansion pace; - EBITDA margin sustainable at or above 14.5% over FY18-FY21; -Capex averaging 3% of sales per annum, reflecting continual investments in store remodelling, IT, as well as moderate expansion through own stores; -No dividend payments and no M&A activity; and -Average annual FCF at 4.3% of sales over FY18-FY21. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action An upgrade of the IDR is unlikely over the rating horizon, as a meaningful improvement in Picard's financial ratios is reliant on a significant improvement in the group's operating performance, which we currently do not foresee. Provided that Picard's business model and profitability remain resilient, future developments that may, individually or collectively, lead to positive rating actions include: - FFO-adjusted leverage below 6.0x (5.5x net of readily available cash) on a sustained basis; and - FFO fixed charge cover above 2.5x (FY17: 1.7x) on a sustained basis. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -FFO-adjusted leverage above 8.0x (7.0x net of cash) by end-FY21, reflecting a too high level of refinancing risk for the current rating closer to major debt maturities; -Deterioration in like-for-like sales and EBITDA margin, as reflected in FCF generation below 4% of sales; and -FFO fixed charge cover below 1.5x. LIQUIDITY Comfortable Liquidity: Picard's liquidity is supported by limited working-capital outflows and low capex. Under the new debt structure liquidity is supported by a EUR30 million RCF maturing in 2023 and lack of meaningful debt repayments up until 2023. FULL LIST OF RATING ACTIONS Picard Bondco S.A. -- EUR310 million senior notes: CCC+'/'RR6'/0% Picard Groupe S.A.S: -- EUR30 million super senior RCF: 'BB-'/'RR2'/90% -- EUR1.19 billion senior secured FRNs: 'B+'/'RR3'/66% Contact: Principal Analyst Anne Porte Director +33 1 44 29 91 36 Supervisory Analyst Sophie Coutaux Senior Director +33 1 44 29 91 32 Fitch France SAS 60, rue de Monceau 75008 Paris Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Date of relevant committee: 27 November 2017 Summary of Financial Statement Adjustments -Readily available cash: At 31 March 2017, Fitch estimated that EUR10 million of the group's reported cash and cash equivalents were needed to fund intra-year working-capital needs, and therefore not considered readily available for debt repayments. -Operating leases: Fitch calculates FFO adjusted leverage ratios by adding to Picard's reported debt amount a multiple of 8x of operating lease expense related to long-term assets (FY17: EUR61.6 million). 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. 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