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Fitch Downgrades Novartex IDR to 'C'; Super Senior Debt on RWP
March 27, 2017 / 3:30 PM / 9 months ago

Fitch Downgrades Novartex IDR to 'C'; Super Senior Debt on RWP

(The following statement was released by the rating agency) LONDON/PARIS, March 27 (Fitch) Fitch Ratings has downgraded French apparel and footwear retail group Novartex SAS's (Vivarte) Long-Term Issuer Default Rating (IDR) to 'C' from 'CC'. At the same time, the agency has placed Vivarte SAS's super senior debt instrument rating of 'CCC-' on Rating Watch Positive (RWP) and affirmed Novarte SAS's reinstated debt at 'C'/RR6 (0%). The IDR downgrade to 'C' follows Vivarte's public announcement of a debt restructuring plan that Fitch views as a distressed debt exchange (DDE) event. Following its DDE criteria, Fitch will downgrade the IDR to Restricted Default ('RD') upon the completion of the debt restructuring. Fitch will likely assign an appropriate IDR for the issuer's post-exchange capital structure, risk profile and prospects. The IDR will reflect Fitch's assessment of Vivarte's new corporate governance, liquidity sources available to fund its turnaround plan and the certainty of near-term material progress in EBITDA generation. The Instrument rating on Novarte SAS's reinstated debt will likely be withdrawn if it is exchanged into equity in its entirety, while the surviving super senior debt instrument may benefit from the post-restructuring capital structure and EBITDA profile. KEY RATING DRIVERS Debt Restructuring: The debt restructuring agreement includes the full conversion of Novarte SAS's reinstated debt (EUR846 million including PIK interests) into equity and the extension of the maturity of the remaining debt ("new money"; EUR874 million as of 31 December 2016 including PIK interests) by two years. Any anticipated writedown is consistent with a 'C' rating, the definition of which includes the formal announcement of a distressed debt exchange. Expected Debt Recoveries: Novarte SAS's reinstated debt 'C'/'RR6'/0% rating reflects expected full writedown through the debt restructuring. Fitch anticipates withdrawing this rating when the instrument's conversion to equity is completed. The RWP on the super senior debt instrument rating reflects Fitch's view that its Recovery Rating could be in the 'RR4' range (implying no notching from the IDR) and Novartex SAS's post-restructuring IDR not lower than 'CCC'. Reduced Enterprise Value: A Recovery Rating of 'RR4' would result from slightly lower post-restructuring EBITDA and distressed multiple than the ones used in our previous analysis (EUR90 million post distress sustainable EBITDA down from EUR100 million, and 4.5x multiple down from 5.0x). Our revised assumptions result from the group's smaller scale after asset disposals and store closures, as well as the likely loss of attractiveness among potential buyers following recurring turnaround failures.. DERIVATION SUMMARY NA KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - materialisation of DDE on the announced terms; - disposal of Chevignon, Pataugas, CVC and Kookai in FY17 (financial year ending 31 August 2017); Merkal, Naf Naf and Andr? in FY18 with total FY17-FY18 cash proceeds of approximately EUR50 million; - low, positive like-for-like sales growth for remaining businesses reflecting some positive impact from management's turnaround initiatives; - progressive recovery in EBITDA margin towards 7% in FY19 (FY16: 2.4%); - capex above EUR100 million in FY17 due to implementation of the core operational restructuring plan, falling to EUR80 million in both FY18 and FY19. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action There are no upgrade sensitivities at this time; the existing capital structure will cease to exist upon completion of the restructuring Future Developments That May, Individually or Collectively, Lead to Negative Rating Action Execution of the DDE LIQUIDITY Adequate Near Term Liquidity: Vivarte has EUR216 million reported cash and cash equivalents (of which EUR100m which Fitch considers as not readily available for debt repayments) on balance sheet at end-December 2016 and should not experience any liquidity issue ahead of the announced debt restructuring. FULL LIST OF RATING ACTIONS Novartex SAS - Long-Term IDR: downgraded to 'C'; Vivarte SAS - Super senior debt ("new money"): 'CCC-'/'RR4' (47%) placed on RWP; Novarte SAS - Senior debt ("reinstated debt"): affirmed at 'C'/'RR6' (0%); Contact: Principal Analyst Louise Liu Analyst +44 20 3530 1660 Supervisory Analyst Anne Porte Director +33 1 44 29 91 36 Fitch France SAS 60 rue de Monceau 75008 Paris Committee Chairperson Ed Eyerman Managing Director +44 20 3530 1359 Summary of Financial Statement Adjustments Readily Available Cash: At 31 August 2016 Fitch estimated EUR100 million of the group's reported cash and cash equivalents as restricted, required to fund the group's intra-year working capital needs. The amount is likely to decrease in FY17 due to working-capital optimisation measures, the planned disposal of several brands, and the full-year impact of past store closures. Operating Leases: Fitch adjusts the debt by adding a multiple of 8x of yearly operating lease expense related to long-term assets (EUR297.8 million in FY16). Funds from Operations (FFO): Fitch excludes from FFO what it estimates to be one-off cash costs related to the ongoing operational restructuring (EUR28.4 million in FY16). Free Cash Flow (FCF): Fitch excludes from its FCF calculation all cash flows related to discontinued activities (- EUR85.3 million in FY16) in order to better assess FCF from continuing operations. Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: Additional information is available on 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 Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Distressed Debt Exchange (pub. 08 Jun 2016) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021153 Solicitation Status here Endorsement Policy here 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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