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Rating Action:

Moody's affirms Carrefour's (P)Baa1 unsecured MTN rating; outlook negative

29 Sep 2020

Paris, September 29, 2020 -- Moody's Investors Service ("Moody's") has today assigned a Baa1 long-term issuer rating to France-based food retailer Carrefour S.A. (Carrefour) and affirmed its (P)Baa1 senior unsecured medium term notes programme rating and (P)P-2 short term rating. The outlook remains negative.

"We have affirmed Carrefour's Baa1 rating because, while its trading has benefited from coronavirus-related restrictions, the company's profitability and cash flow generation are forecast to improve through 2021 thanks to the ongoing implementation of its transformation program," said Vincent Gusdorf, a Vice President -- Senior Credit Officer at Moody's and lead analyst for Carrefour.

"However, Carrefour remains under negative outlook because its gross leverage will remain high in 2020 and its cash flow generation is still low for the current rating, meaning that there could be negative rating action if the improvements we expect do not materialize over the next 12-18 months," Mr Gusdorf added.

RATINGS RATIONALE

Carrefour has embarked on a far-reaching transformation plan, Carrefour 2022, which is starting to yield positive results. The group has lowered its prices, reduced its product offering and increased the sales of private labels, among others. It is also cutting its costs, with €2.4 billion of savings achieved as of 30 June 2020 since 2017, reducing selling areas and opening new convenience stores. Thanks to lower restructuring charges and improving underlying profitability, Moody's forecasts that Carrefour's EBITDA margin will increase to 5.8% in 2020 from 4.9% in 2019, on a Moody's-adjusted basis. Profitability will stabilise afterwards, as the full year effect of cost savings will offset deteriorating economic conditions.

Leverage will decline, but remains high. The rating agency expects Carrefour's gross debt/EBITDA ratio to fall to 3.4x in 2020 from 3.8x in 2019, compared to a maximum leverage target of 3.25x for the current Baa1 rating. Leverage is forecast to decline to 3.2x in 2021 under Moody's base-case scenario, but this will be dependent on the company's aforementioned margin expansion.

Moody's forecasts that RCF/net debt will stay in excess of 30%, but despite the company's scale and the fact that it pays a large share of its dividends in shares, the group failed to generate significantly positive Moody's-adjusted free cash flow (FCF) between 2013 and 2019. Although FCF should improve through 2021, it will remain lower than that of peers Koninklijke Ahold Delhaize N.V. (Ahold Delhaize, Baa1 stable) and only start to be more in line with The Kroger Co. (Baa1 stable).

Carrefour has good liquidity. As of 30 June 2020, the group had €2.8 billion of cash on balance sheet and access to €3.9 billion in undrawn credit facilities with no financial covenants, maturing in 2024. Liquidity sources fully cover €1.9 billion worth of short-term debt. Debt maturities are well-spread, with around €800 million-€1,000 million in bonds that will mature each year between 2021 and 2023. However, seasonal variations in working capital are substantial, with sizable cash outflows in the first half of the year, which reverse in the second half, and Carrefour has large amounts outstanding under its reverse factoring programme.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects Moody's view that Carrefour will need to improve its leverage and its free cash flow generation further to maintain a credit profile commensurate with a Baa1 rating. While the Carrefour 2022 transformation programme will support sales and profit margins over the next 12 months, the group continues to face significant challenges, notably its sizeable exposure to hypermarkets and the downturn in European economies. In this context, Moody's expects the group's financial policy to remain prudent with only a small number of bolt-on acquisitions and that it will continue to pay part of its dividends in shares until cash flow sufficiently improves.

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

Moody's could downgrade Carrefour's rating if, on a Moody's-adjusted basis, its EBITDA margin does not increase toward 6%, its debt/EBITDA remains above 3.25x, its RCF/net debt falls below 25%, or if it fails to generate substantially positive FCF. Such a scenario could unfold if Carrefour fails to successfully implement its ongoing transformation plan. A more aggressive financial policy, as shown for instance by an increase in dividends or large debt-funded acquisitions, would also cause a downgrade.

A rating upgrade is unlikely in the near term in light of the negative outlook. However, Moody's could upgrade Carrefour's rating if it significantly improves its earnings and its market shares, thanks notably to a successful repositioning of its French hypermarkets. Quantitatively, an upgrade would require a debt/EBITDA ratio comfortably below 2.75x and a retained cash flow (RCF)/net debt ratio sustainably above 35% as well as a sizable increase in FCF, on a Moody's-adjusted basis.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

With €71 billion of revenue over the 12 months that ended 30 June 2020, Carrefour S.A. (Carrefour) is one of the largest retailers in the world, after Walmart Inc. (Aa2 stable) and The Kroger Co., but ahead of Tesco Plc (Baa3 stable) and Ahold Delhaize. As of 30 June 2020, Carrefour operated a broad portfolio of 12,669 stores consisting of hypermarkets — which accounted for about half of the group's sales — supermarkets, proximity formats and cash-and-carry stores.

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 unsolicited.

a.With Rated Entity or Related Third Party Participation: YES

b.With Access to Internal Documents: YES

c.With Access to Management: YES

For additional information, 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_1133569.

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

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.

Vincent Gusdorf, CFA
VP - Senior Credit Officer
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.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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