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Rating Action:

Moody's affirms Carrefour's rating at (P)Baa2; outlook changed to positive

25 Mar 2014

London, 25 March 2014 -- Moody's Investors Service has today affirmed the (P)Baa2 long-term senior unsecured MTN Programme rating and the short-term (P)P-2 rating of Carrefour S.A. ('the company'). The outlook is changed to positive from stable.

RATINGS RATIONALE

"Today's rating action follows the improvement in the company's credit metrics over the past year. This reflects Carrefour's successful turnaround in earning of its French operations," says Sven Reinke, a Moody's Vice President -- Senior Analyst and lead analyst for Carrefour. "Key credit metrics also benefited from the reduction in reported gross debt and the associated decrease in interest expense driven by the company's bond buy-back." In addition, Moody's expects that metrics will continue to benefit from a moderately improving operating performance and significantly lower exceptional items impacting Carrefour's cash flow generation.

Moody's recognizes Carrefour's significant improvement in its French home market where it recorded a 1.0% organic sales growth (excluding petrol) in 2013 and a 29.9% increase in the recurring operating income. The operating margin in France improved substantially by 80bps from 2.6% in 2012 to 3.4% in 2013 and H2 2013 was the third consecutive semester of improved profitability with an operating margin of 3.9% (3.5% in H2 2012). Carrefour made significant progress in France with a number of measures including an improved price positioning, the launch of a multi-year store renovation program and supply chain rationalization.

However, Moody's also notes that Carrefour's performance in other regions was mixed with strong organic sales growth and improving operating margins in Latin America, organic sales decline and reduced margins in Europe albeit some stabilization in the second half of 2013 and a deterioration in the operating margin in Asia from 2.8% in 2012 to 2.0% in 2013 driven by wage inflation and build-up costs of 20 new hypermarkets in China.

Despite stable cash flow from operations of EUR3.0 billion and low cash dividends of EUR209 million, Carrefour's reported net debt lowered by only EUR0.2 billion due to higher capex of EUR2.2 billion (EUR1.5 billion in 2012) and EUR1.1 billion of non-recurring cash outflow following the settlement of several old tax disputes. Moody's recognizes the exceptional character of the accumulation of high cash outflow for these settlements and adjusts for the majority of the cash outflow.

Driven by improved EBITDA generation and reduced gross debt in particular because the company applied a portion of its large cash balance to debt reduction, Carrefour's leverage, measured as debt/EBITDA, lowered materially to 4.1x from 5.1x in the previous year while on a net debt basis the leverage came down to 3.0x from 3.4x. Its retained cash flow (RCF)/net debt metric rose moderately to 21.7% from 19.9% in 2012. In addition, the company's interest coverage strengthened on the back of higher profitability and the gross debt reduction that resulted in EUR60 million lower interest expenses.

Carrefour's (P)Baa2/(P)P-2 senior unsecured and short-term ratings reflect the company's solid business risk profile, with a significant exposure to food retail and a large exposure to growth markets. Carrefour is also one of the most international among rated retailers rated by Moody's, while in terms of scale it is one of the largest retailer globally. The rating, however, also reflects the weaker performance in some markets such as Spain and Italy where Carrefour suffers from the still subdue economic environment. The rating further factors in the solid liquidity profile with a well balanced debt maturity schedule and the substantial reduction in gross and net debt since the peak in FY2010.

The positive outlook reflects Moody's expectation of further improvements in Carrefour's earnings driven by continuing progress in France as well as a recovery in other regions, which could lead to an upgrade to (P)Baa1 over the next few quarters. Higher capex in FY2014 is expected to be offset by lower cash outflow for exceptional items and low cash dividend payments leading to gradually improving credit metrics.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive rating pressure could be exerted on Carrefour's rating if the company's adjusted leverage moves towards 3.5x and its RCF/net debt remains at about 20% on a sustainable basis. As Moody's expects cash to be used to repay debt over time, to assess the gross leverage ratio, Moody's uses a normalized level of cash of EUR3 billion (Moody's estimate). Under this assumption, the leverage ratio would be around 3.7x at year-end 2013, which positions Carrefour strongly in the Baa2 category. Conversely, the rating or outlook could come under negative pressure if Carrefour's adjusted leverage were to exceed 4.0x on a continued basis, as a result of operating underperformance or if the company were to resume aggressive shareholder-oriented initiatives.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was the Global Retail Industry published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Carrefour S.A. is one of the world's largest retailer in terms of revenues. It retains operations in countries in Europe, Latin America and Asia, with Carrefour, Carrefour Market, Carrefour Express, and Atacadao being among its major banners. It also operates under the hypermarket, supermarket, convenience store and cash & carry formats. In 2013, Carrefour reported net sales and recurring operating income of EUR74.9 billion and EUR2.2 billion, respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

This rating was initiated by Moody's and was not requested by the rated entity.

This rated entity or its agent(s) participated in the rating process. The rated entity or its agent(s) provided Moody's access to the books, records and other relevant internal documents of the rated entity.

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

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.

Sven Reinke
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Carrefour's rating at (P)Baa2; outlook changed to positive
No Related Data.
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