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RATING ACTION COMMENTARY
Fitch Assigns Casino, Guichard-Perrachon S.A. First-Time 'B-' Rating; Outlook Positive
Fri 25 Nov, 2022 - 09:34 ET
Fitch Ratings - Stockholm - 25 Nov 2022: Fitch Ratings has assigned France-based retailer Casino, Guichard-Perrachon S.A. (Casino) a 'B-' Long-Term Issuer Default Rating (IDR). The Outlook is Positive. A full list of rating actions is at the end of this commentary.
The IDR reflects a business profile commensurate with a higher rating level, but this is offset by a weak financial profile. Casino has strong positions in the most dynamic geographies of the French food retail market and in Latin America (LatAm), good profit margin and online capabilities. These strengths are offset by high legacy leverage and potential liquidity risks over the coming 18 months, remaining challenges in executing the company's business plan amid a more difficult economic environment for consumers and our forecast of weak free cash flow (FCF) generation until at least 2024.
The Positive Outlook reflects Fitch's expectation of substantial improvement in Casino's leverage, through disposals, including the completion of its significant asset disposal plan that started in 2018. The plan is likely to continue into 2023. We currently assume that Casino will reduce leverage to be in line with conditions for an upgrade by the end of 2023. However, we still see some execution risks in its timely realisation to raise the resources necessary to meet 2024 debt repayment maturities with a good safety cushion.
KEY RATING DRIVERS
High Leverage; May Reduce by 2024: We forecast that net adjusted debt/EBITDAR in 2022 will stay above the level commensurate with its rating at 7.2x, despite disposals during the year. Casino is optimising its debt structure by disposing of assets, while it is not upstreaming cash to its parent, which we project should lead to leverage normalising within the rating sensitivity level of 6.0x in 2023.
Successful debt reduction through repayment and/or repurchases remains critical for the rating trajectory. We assume that there will not be any cash dividend paid to the parent Rallye until at least 2025 as the board is committed to deleveraging the balance sheet.
Disposal Plan in Progress: Casino disposed of EUR1.4 billion of assets in 2020-2021, and we expect another EUR1.4 billion in 2022. Our forecast assumes further disposals of EUR1.7 billion in 2023-2025, including full monetisation of Exito, and EUR1.0 billion of asset sales in France (real estate, non-core and minority stakes in operational assets). Our forecast assumes that Casino's disposal pipeline will be completed by end-2025, although there are some execution risks.
Parent-Subsidiary Linkage: Fitch uses its Parent and Subsidiary Linkage Rating Criteria to assess the rating perimeter of Casino and its relationship both with Rallye, its major shareholder, and with its consolidated operations in LatAm. We view Rallye as a "weaker parent", given its leverage and limited other assets, and we assess the legal ring-fencing of Casino as 'Insulated'. Combined with 'Porous' access and control, this results in Casino being rated based on its Standalone Credit Profile.
At the same time, limited recourse to cash flows from the 41% owned LatAm operations leads to Fitch's deconsolidation of the business for the rating analysis as per the Corporate Rating Criteria.
Inflation Challenges Margin Improvement: We forecast inflation to slow profitability improvement from cost savings and expansion through the franchise business model. We assume like-for-like revenue growth for 2023 at 1.5%, below Fitch's forecast of CPI inflation in France at 3.4%, as we expect Casino's premium offerings to take a bigger volume hit than the market average in a challenging consumer environment.
However, the Fitch rating case projects EBITDAR margin to modestly improve by 50 bp in 2023 to 9.1% and remain broadly stable in subsequent years thanks to a recent shared purchase procurement agreement and cost savings initiatives. Our assumptions take into account 60% of the cost savings identified by management.
Capex-light Franchise Expansion: Casino's growth strategy is mainly to expand its franchise network in proximity and convenience format using its strong local brand. Low capex for franchise network development and its higher profitability should support better operating margins and help organic deleveraging. While capex intensity is likely to be lower, we still expect Casino's FCF to be pressured by higher interest expenses and its FCF margin will not exceed 0.5% in 2023. However, once EBITDA strengthens and, if interest charges fall on more debt being repaid from 2024, we believe FCF margin may rise towards 1% to 2%.
Solid Business Profile: Casino has strong positioning in the French food retail sector, albeit with regional strengths rather than a national player, and growing, well-established and structurally profitable non-food e-commerce activity via CDiscount. The latter contributes 5% to 10% of group EBITDA and can be a valuable monetisable asset in the medium term. We also believe the company is building important competitive advantages in food delivery and environmental and social sustainability. However, its focus on the upscale market carries risks in an economic downturn.
Corporate Governance Risks: Although debt documentation limits Casino's potential cash upstream to Rallye, we continue to believe that the long-term interests of Casino's shareholders are not aligned with those of debtholders, because dividends from Casino remain a key source of funds for debt repayment for Rallye. In addition, the same person is CEO of Casino, as well as chairman and controlling shareholder of Rallye and the subsidiary.
However, Casino's corporate governance has improved and is less shareholder-friendly, with no dividends paid to Rallye in 2020-2022.
DERIVATION SUMMARY
Fitch applies its Food-Retail Navigator framework to assess Casino's rating and position relative to peers'. Comparing Casino's rating with international retail chains, such as Tesco PLC (BBB-/Stable), Casino has smaller business scale and more limited geographic diversification, which are partly offset by somewhat stronger profitability reflected in an 8% EBITDAR margin at Casino compared with Tesco's around 7%.
Relative to Bellis Finco plc (ASDA, BB-/Negative) and Market Holdco 3 Limited (Morrisons, BB-/Stable), Casino is rated three notches lower as it has a smaller size and higher expected financial leverage of 7.2x on a net adjusted debt/EBITDAR basis in 2022 compared to ASDA's 5.4x and Morrison's 6.5x.
Relative to WD FF Limited (Iceland, B/Negative), Casino is rated one notch lower given its higher leverage of 7.2x in 2022 compared with Iceland's 6.7x, which is only partially offset by its larger size and stronger profitability.
Compared with Picard Bondco S.A. (B/Negative), Casino is rated one notch lower because Picard's smaller size and similar leverage are well compensated by the latter's stronger profitability and FCF generation as well as lower execution risks.
No parent-subsidiary linkage or Country Ceiling aspects were applied to these ratings.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- 1.5% annual like-for-like sales growth for Casino's French retail business from 2023 as price increases are partially offset by lower volumes;
- 2.1%-2.5% overall annual growth in French retail business as franchisee expansion complements like-for-like growth;
- EBITDA margin dropping to 4.8% in 2022 (2021: 5.3%) and gradually improving to 5.8% in 2025 supported by cost-saving measures, including more efficient purchasing terms, and by franchisee expansion, although partially offset, particularly in 2022-2023, by higher energy and labour costs as well as delays in passing on higher cost of goods;
- Working capital inflow of EUR40 million a year from 2022 reflecting normalised working capital following the completion of the restructuring plan;
- Capex intensity at 2.2%-2.5% of sales;
- EUR1.4 billion of assets sales in 2022 followed by EUR1.7 billion over 2023-2025; and
- No dividends or M&A until 2025.
Fitch's Key Assumptions on Recovery Ratings:
- The recovery analysis assumes that Casino would be considered a going concern in bankruptcy and that it would be reorganised rather than liquidated in case of default. We have assumed a 10% administrative claim in the recovery analysis.
- We have assumed that Casino's debtholders would get additional value from CBD (holding company for LatAm operations) of EUR2.0 billion after applying a 20% haircut from the valuation of the participation of Casino in CBD and its listed subsidiaries Assai and Exito as of September 2022 (pro-forma for the spin-off of Exito) and after deducting debt at Segisor level, an intermediate holding group.
- We have applied a distressed enterprise value/EBITDA of 5.0x, in line with comparable businesses and reflecting the maturity and characteristics of Casino's businesses under the restricted group (i.e. excluding LatAm operations).
- In our bespoke going-concern recovery analysis we consider an estimated post-restructuring EBITDA available to creditors of EUR700 million. This is sufficient to cover a cash debt service cost of around EUR345 million, estimated cash taxes under stressed scenario of about EUR40 million and a sustainable level of capex of around EUR260 million to maintain the viability of Casino's business model, representing a 18% discount to FY21 Fitch adjusted EBITDA.
Our going concern assumptions would result in an outstanding recovery rate for Casino's senior secured debt leading to a Recovery Rating of 'RR1', indicating a 'BB-' instrument rating. The waterfall analysis output percentage on current assumptions stands at 100% for this debt class. Following the payment waterfall, our assumptions result in under average recoveries for the senior unsecured notes issued by Casino leading to a 'RR5' and 'CCC+' instrument rating with an output percentage of 20%, and no recoveries for the perpetual bonds (hybrids), which are treated as debt, leading to an 'RR6' and 'CCC' with an output percentage of 0%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Continued conservative financial policy including no dividend payments, with asset disposal plan completion in line or ahead of Fitch's forecasts and proceeds ensuring sufficient liquidity cushion.
- EBITDAR margin consistently above 8%
- Adjusted net debt/EBITDAR consistently below 6.0x
- Operating EBITDAR/net interest paid + Rents above 1.5x
Factors that could, individually or collectively, lead to revision of the Outlook to Stable:
- Liquidity below 2.0x, with available cash, revolving credit facility (RCF) funds and cash in segregated accounts not covering the debt maturities in the next 18-24 months
- Delay in execution of asset disposal plan
- Lack of visibility over adjusted net debt/EBITDAR trending consistently below 6.0x by 2023
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Liquidity below 1.5x, with available cash, RCF funds and cash in segregated accounts not covering the debt maturities in the next 18-24 months
- Operating EBITDAR/net interest paid + rents below 1.2x
- Adjusted net debt/EBITDAR consistently above 7.0x
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: At end-September 2022, Casino had a fully undrawn EUR2.1 billion RCF, but with availability limited to EUR605 million at that date due to the 3.5x secured leverage covenant. There was also EUR403 million of cash on the balance sheet. We expect that the main source of liquidity for debt repayment to be proceeds from planned asset sales - EUR1.4 billion in 2022 and up to EUR1.7 billion assumed under the Fitch rating case. We expect that the funds from divestments to be completed by the end of 2022 to be sufficient to cover 2023 maturities.
The company's debt maturity profile remains somewhat concentrated with important maturities in 2024 (EUR1.2 billion) and 2025 (EUR1.8 billion).
DATE OF RELEVANT COMMITTEE
21 November 2022
Fitch Assigns Casino, Guichard-Perrachon S.A. First-Time 'B-' Rating; Outlook Positive
Fri 25 Nov, 2022 - 09:34 ET
Fitch Ratings - Stockholm - 25 Nov 2022: Fitch Ratings has assigned France-based retailer Casino, Guichard-Perrachon S.A. (Casino) a 'B-' Long-Term Issuer Default Rating (IDR). The Outlook is Positive. A full list of rating actions is at the end of this commentary.
The IDR reflects a business profile commensurate with a higher rating level, but this is offset by a weak financial profile. Casino has strong positions in the most dynamic geographies of the French food retail market and in Latin America (LatAm), good profit margin and online capabilities. These strengths are offset by high legacy leverage and potential liquidity risks over the coming 18 months, remaining challenges in executing the company's business plan amid a more difficult economic environment for consumers and our forecast of weak free cash flow (FCF) generation until at least 2024.
The Positive Outlook reflects Fitch's expectation of substantial improvement in Casino's leverage, through disposals, including the completion of its significant asset disposal plan that started in 2018. The plan is likely to continue into 2023. We currently assume that Casino will reduce leverage to be in line with conditions for an upgrade by the end of 2023. However, we still see some execution risks in its timely realisation to raise the resources necessary to meet 2024 debt repayment maturities with a good safety cushion.
KEY RATING DRIVERS
High Leverage; May Reduce by 2024: We forecast that net adjusted debt/EBITDAR in 2022 will stay above the level commensurate with its rating at 7.2x, despite disposals during the year. Casino is optimising its debt structure by disposing of assets, while it is not upstreaming cash to its parent, which we project should lead to leverage normalising within the rating sensitivity level of 6.0x in 2023.
Successful debt reduction through repayment and/or repurchases remains critical for the rating trajectory. We assume that there will not be any cash dividend paid to the parent Rallye until at least 2025 as the board is committed to deleveraging the balance sheet.
Disposal Plan in Progress: Casino disposed of EUR1.4 billion of assets in 2020-2021, and we expect another EUR1.4 billion in 2022. Our forecast assumes further disposals of EUR1.7 billion in 2023-2025, including full monetisation of Exito, and EUR1.0 billion of asset sales in France (real estate, non-core and minority stakes in operational assets). Our forecast assumes that Casino's disposal pipeline will be completed by end-2025, although there are some execution risks.
Parent-Subsidiary Linkage: Fitch uses its Parent and Subsidiary Linkage Rating Criteria to assess the rating perimeter of Casino and its relationship both with Rallye, its major shareholder, and with its consolidated operations in LatAm. We view Rallye as a "weaker parent", given its leverage and limited other assets, and we assess the legal ring-fencing of Casino as 'Insulated'. Combined with 'Porous' access and control, this results in Casino being rated based on its Standalone Credit Profile.
At the same time, limited recourse to cash flows from the 41% owned LatAm operations leads to Fitch's deconsolidation of the business for the rating analysis as per the Corporate Rating Criteria.
Inflation Challenges Margin Improvement: We forecast inflation to slow profitability improvement from cost savings and expansion through the franchise business model. We assume like-for-like revenue growth for 2023 at 1.5%, below Fitch's forecast of CPI inflation in France at 3.4%, as we expect Casino's premium offerings to take a bigger volume hit than the market average in a challenging consumer environment.
However, the Fitch rating case projects EBITDAR margin to modestly improve by 50 bp in 2023 to 9.1% and remain broadly stable in subsequent years thanks to a recent shared purchase procurement agreement and cost savings initiatives. Our assumptions take into account 60% of the cost savings identified by management.
Capex-light Franchise Expansion: Casino's growth strategy is mainly to expand its franchise network in proximity and convenience format using its strong local brand. Low capex for franchise network development and its higher profitability should support better operating margins and help organic deleveraging. While capex intensity is likely to be lower, we still expect Casino's FCF to be pressured by higher interest expenses and its FCF margin will not exceed 0.5% in 2023. However, once EBITDA strengthens and, if interest charges fall on more debt being repaid from 2024, we believe FCF margin may rise towards 1% to 2%.
Solid Business Profile: Casino has strong positioning in the French food retail sector, albeit with regional strengths rather than a national player, and growing, well-established and structurally profitable non-food e-commerce activity via CDiscount. The latter contributes 5% to 10% of group EBITDA and can be a valuable monetisable asset in the medium term. We also believe the company is building important competitive advantages in food delivery and environmental and social sustainability. However, its focus on the upscale market carries risks in an economic downturn.
Corporate Governance Risks: Although debt documentation limits Casino's potential cash upstream to Rallye, we continue to believe that the long-term interests of Casino's shareholders are not aligned with those of debtholders, because dividends from Casino remain a key source of funds for debt repayment for Rallye. In addition, the same person is CEO of Casino, as well as chairman and controlling shareholder of Rallye and the subsidiary.
However, Casino's corporate governance has improved and is less shareholder-friendly, with no dividends paid to Rallye in 2020-2022.
DERIVATION SUMMARY
Fitch applies its Food-Retail Navigator framework to assess Casino's rating and position relative to peers'. Comparing Casino's rating with international retail chains, such as Tesco PLC (BBB-/Stable), Casino has smaller business scale and more limited geographic diversification, which are partly offset by somewhat stronger profitability reflected in an 8% EBITDAR margin at Casino compared with Tesco's around 7%.
Relative to Bellis Finco plc (ASDA, BB-/Negative) and Market Holdco 3 Limited (Morrisons, BB-/Stable), Casino is rated three notches lower as it has a smaller size and higher expected financial leverage of 7.2x on a net adjusted debt/EBITDAR basis in 2022 compared to ASDA's 5.4x and Morrison's 6.5x.
Relative to WD FF Limited (Iceland, B/Negative), Casino is rated one notch lower given its higher leverage of 7.2x in 2022 compared with Iceland's 6.7x, which is only partially offset by its larger size and stronger profitability.
Compared with Picard Bondco S.A. (B/Negative), Casino is rated one notch lower because Picard's smaller size and similar leverage are well compensated by the latter's stronger profitability and FCF generation as well as lower execution risks.
No parent-subsidiary linkage or Country Ceiling aspects were applied to these ratings.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- 1.5% annual like-for-like sales growth for Casino's French retail business from 2023 as price increases are partially offset by lower volumes;
- 2.1%-2.5% overall annual growth in French retail business as franchisee expansion complements like-for-like growth;
- EBITDA margin dropping to 4.8% in 2022 (2021: 5.3%) and gradually improving to 5.8% in 2025 supported by cost-saving measures, including more efficient purchasing terms, and by franchisee expansion, although partially offset, particularly in 2022-2023, by higher energy and labour costs as well as delays in passing on higher cost of goods;
- Working capital inflow of EUR40 million a year from 2022 reflecting normalised working capital following the completion of the restructuring plan;
- Capex intensity at 2.2%-2.5% of sales;
- EUR1.4 billion of assets sales in 2022 followed by EUR1.7 billion over 2023-2025; and
- No dividends or M&A until 2025.
Fitch's Key Assumptions on Recovery Ratings:
- The recovery analysis assumes that Casino would be considered a going concern in bankruptcy and that it would be reorganised rather than liquidated in case of default. We have assumed a 10% administrative claim in the recovery analysis.
- We have assumed that Casino's debtholders would get additional value from CBD (holding company for LatAm operations) of EUR2.0 billion after applying a 20% haircut from the valuation of the participation of Casino in CBD and its listed subsidiaries Assai and Exito as of September 2022 (pro-forma for the spin-off of Exito) and after deducting debt at Segisor level, an intermediate holding group.
- We have applied a distressed enterprise value/EBITDA of 5.0x, in line with comparable businesses and reflecting the maturity and characteristics of Casino's businesses under the restricted group (i.e. excluding LatAm operations).
- In our bespoke going-concern recovery analysis we consider an estimated post-restructuring EBITDA available to creditors of EUR700 million. This is sufficient to cover a cash debt service cost of around EUR345 million, estimated cash taxes under stressed scenario of about EUR40 million and a sustainable level of capex of around EUR260 million to maintain the viability of Casino's business model, representing a 18% discount to FY21 Fitch adjusted EBITDA.
Our going concern assumptions would result in an outstanding recovery rate for Casino's senior secured debt leading to a Recovery Rating of 'RR1', indicating a 'BB-' instrument rating. The waterfall analysis output percentage on current assumptions stands at 100% for this debt class. Following the payment waterfall, our assumptions result in under average recoveries for the senior unsecured notes issued by Casino leading to a 'RR5' and 'CCC+' instrument rating with an output percentage of 20%, and no recoveries for the perpetual bonds (hybrids), which are treated as debt, leading to an 'RR6' and 'CCC' with an output percentage of 0%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Continued conservative financial policy including no dividend payments, with asset disposal plan completion in line or ahead of Fitch's forecasts and proceeds ensuring sufficient liquidity cushion.
- EBITDAR margin consistently above 8%
- Adjusted net debt/EBITDAR consistently below 6.0x
- Operating EBITDAR/net interest paid + Rents above 1.5x
Factors that could, individually or collectively, lead to revision of the Outlook to Stable:
- Liquidity below 2.0x, with available cash, revolving credit facility (RCF) funds and cash in segregated accounts not covering the debt maturities in the next 18-24 months
- Delay in execution of asset disposal plan
- Lack of visibility over adjusted net debt/EBITDAR trending consistently below 6.0x by 2023
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Liquidity below 1.5x, with available cash, RCF funds and cash in segregated accounts not covering the debt maturities in the next 18-24 months
- Operating EBITDAR/net interest paid + rents below 1.2x
- Adjusted net debt/EBITDAR consistently above 7.0x
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: At end-September 2022, Casino had a fully undrawn EUR2.1 billion RCF, but with availability limited to EUR605 million at that date due to the 3.5x secured leverage covenant. There was also EUR403 million of cash on the balance sheet. We expect that the main source of liquidity for debt repayment to be proceeds from planned asset sales - EUR1.4 billion in 2022 and up to EUR1.7 billion assumed under the Fitch rating case. We expect that the funds from divestments to be completed by the end of 2022 to be sufficient to cover 2023 maturities.
The company's debt maturity profile remains somewhat concentrated with important maturities in 2024 (EUR1.2 billion) and 2025 (EUR1.8 billion).
DATE OF RELEVANT COMMITTEE
21 November 2022
