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Rating Action:

Moody's affirms CBR's B2 CFR and change outlook to stable from negative

20 Apr 2021

B2 rating assigned to the proposed €470 Senior Secured notes

Paris, April 20, 2021 -- Moody's Investors Service (Moody's) has today changed the outlook of German apparel company CBR Service GmbH (CBR) to stable from negative. Concurrently, Moody's has affirmed the company's B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR). Moody's has also assigned a B2 rating to the proposed €470 million guaranteed senior secured notes due 2026 to be issued by CT Investment GmbH, a new holding company and subsidiary of CBR Service GmbH.

Concurrently, Moody's has affirmed the existing instruments ratings of the group, including the B2 rating assigned on the €450 million guaranteed senior secured notes due 2022 issued by CBR Fashion Finance B.V. and the Ba2 rating assigned on the €30 million guaranteed revolving credit facility (RCF) issued by CBR Fashion GmbH. The instrument ratings of these entities will be withdrawn once the proposed refinancing transaction will close. The outlook for CBR Service GmbH, CBR Fashion GmbH and CBR Fashion Finance B.V. has changed to stable from negative. Moody's has assigned a stable outlook for CT Investment GmbH.

The proceeds from the proposed issuance will be used to (1) repay the existing senior secured notes due 2022; (2) repay the senior loan contracted during the covid-19 pandemic in 2020; and (3) pay transaction fees and related costs.

"Today's rating action reflects CBR's resilient operating performance during the pandemic, reflecting its asset-light business model and growing online channel", says Guillaume Leglise, a Moody's Assistant Vice President and lead analyst for CBR. "While trading conditions remain challenging, with some store closures since mid-December 2020 in Germany, we expect CBR's earnings to recover and free cash flow to continue to be positive in the next 18 months, as seen prior the pandemic", adds Mr Leglise.

RATINGS RATIONALE

The B2 CFR reflects (1) CBR's resilient trading performance in 2020 despite the impact of the pandemic in Europe, including in Germany, its main market; (2) its good credit metrics for the rating category underpinned by high margins, high interest cover and positive free cash flow (FCF) expected in the next two years; (3) its asset-light business model and limited direct inventory risk with most of the production already covered by the orders of CBR's wholesale clients; and (4) its good track record in terms of operational execution and historically good control of its value chain, combined with growing online capabilities.

Conversely, the B2 CFR incorporates (1) the company's history of shareholder-oriented financial policies as evidenced by the company's numerous past dividends; (2) its leveraged capital structure despite a track record of significant gross deleveraging since 2017; (3) the company's relatively small scale and exposure to the highly competitive woman clothing market in Germany; and (4) its exposure to fashion risk, although this is mitigated by relatively short lead times and low inventory risk.

Pro forma the proposed refinancing transaction, CBR's leverage ratio (total gross debt to EBITDA as adjusted by Moody's) will be high at around 5.1x based on 2020 earnings, compared with 2.8x in 2019. While the proposed refinancing does not involve additional debt, the company's earnings have been negatively impacted by the store lockdown restrictions during 2020 and translated into a 39% decline in Moody's-adjusted EBITDA. However, Moody's expects the company's earnings to recover towards pre-crisis levels in the next 18 months thanks to gradually improving trading conditions, which should support deleveraging towards 4.5x by 2022.

Pro forma the proposed transaction, CBR's liquidity is adequate. CBR's liquidity is supported by: (1) an initial cash balance of €68 million; (2) access to an undrawn €50 million RCF; and (3) Moody's expectations of positive FCF over the next 12-18 months. The new RCF is subject to a springing senior net leverage covenant, with ample capacity today, tested quarterly if more than 40% of the facility is drawn.

STABLE OUTLOOK

The stable outlook reflects Moody's view that CBR's sales and earnings will gradually recover towards pre-crisis levels over the next two years, owing to more normalized trading conditions, a growing contribution from the online segment and the company's flexible cost structure. The stable outlook also incorporates Moody's expectations that CBR will continue to generate positive FCF and will maintain an adequate liquidity profile.

ESG CONSIDERATIONS

Overall, Moody's considers social risk to be moderate for the apparel retail industry. Changes in customer behavior, notably the shift to online, creates challenges for incumbent retailers. This risk is mitigated by the fact that CBR has already developed strong omni-channel capabilities, with online sales representing around 24% of the group's 2020 revenue. As an apparel retailer, CBR is also subject to social factors such as responsible sourcing, product and supply sustainability, privacy and data protection.

CBR is controlled by Alteri Investors (Alteri) which, as is often the case in highly levered, private equity sponsored deals, has a high tolerance for leverage and where governance is comparatively less transparent. The company has shareholder-friendly financial policies. Since the 2018 leverage buyout, CBR has distributed approximately €195 million to its sponsor via cash dividends and shareholder loans.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Positive pressure could materialize overtime if: (1) CBR demonstrates a good operational execution as evidenced by positive growth in both sales and profits; (2) its adjusted gross debt/EBITDA trends below 4.5x on a sustainable basis; (3) it continues to generate positive FCF while it demonstrates more balanced financial policies, which would be reflected in fewer and lower dividend recapitalisations or shareholder loans.

Conversely, negative pressure on the rating could materialize if: (1) CBR's FCF generation weaken and its liquidity deteriorates; (2) its adjusted gross debt/EBITDA remains sustainably above 5.5x; or (3) its Moody's adjusted EBITA/interest expense fell below 2.5x.

STRUCTURAL CONSIDERATIONS

The B2 rating assigned to the proposed €470 million senior secured notes due 2026 issued by CT Investment GmbH reflects their presence as the largest debt instrument in the capital structure, ranking behind the €50 million super-senior RCF. The notes and the RCF benefit from a similar maintenance guarantor package, including upstream guarantees from guarantor subsidiaries, representing around 87% of CBR's consolidated EBITDA. Both instruments are secured, on a first-priority basis, by certain share pledges, security assignments over intercompany receivables, and security over material bank accounts. However, the notes are contractually subordinated to the RCF with respect to the collateral enforcement proceeds.

The probability of default rating of B2-PD reflects the use of a 50% family recovery assumption, consistent with a capital structure including a mix of bond and bank debt. The capital structure has limited covenants overall, with the lenders relying only on incurrence covenants contained in the senior secured notes indentures, as well as one maintenance covenant defined as net leverage, with ample capacity initially. This covenant is only tested if outstanding borrowings under the super senior RCF are equal to or greater than 40% of the overall commitment.

CBR's capital structure also includes an existing €109 million shareholder loan, whose terms and conditions have been amended as part of the transaction. Moody's treats this shareholder loan as equity in its credit metrics calculations.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Apparel Methodology published in October 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1182038. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Celle, Germany, with revenue of €508 million and reported EBITDA (as adjusted by the company) of €114.9 million in 2020, CBR is one of the leading German apparel companies. The company operates under two independent brands: Street One (casual, fashionable clothing) and Cecil (sporty, less figure accentuating clothing), which account for around 55% and 45% of revenue, respectively.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Guillaume Leglise
Asst Vice President - Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Jeanine Arnold
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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