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Announcement:

Moody's affirms Metro AG at Baa2; negative outlook

15 May 2012

Approximately EUR4.4 billion in rated securities affected

London, 15 May 2012 -- Moody's Investors Service has today affirmed the Baa2 long-term issuer and senior unsecured ratings and the P-2 short-term rating of Metro AG; the outlook remains negative.

RATINGS RATIONALE

"The affirmation reflects our view that the company has some levers with which to moderately improve metrics in the current year in spite of the company's current guidance that an improvement in its earnings in 2012 is unlikely," says Richard Morawetz, a Moody's Vice President -- Senior Credit Officer and lead analyst for Metro. The negative outlook continues to reflect, however, the fact that Metro's earnings did not improve in 2011 as had been previously forecast by the company, and our view that metrics will remain weakly-positioned for the rating for the remainder of the year, with very limited headroom for any further deterioration.

As of financial year end (FYE) 2011, Metro's gross adjusted leverage stood at 4.4x and its ratio of retained cash flow (RCF)/net debt was 13.8% (these metrics are before adjusting EBITDA for exceptional items of EUR222 million related to the company's Shape 2012 initiatives, which negatively impacts reported EBITDA). Currently, the company anticipates that its EBIT before special items will remain relatively unchanged in 2012 versus 2011, at approximately EUR2.4 billion. Metro's earnings deteriorated in the first quarter of 2012, which the company attributed mainly to price investments in its Cash and Carry and Media Markt Saturn divisions, although Moody's notes that this is the least significant quarter for the company in terms of annual earnings.

Nevertheless, for the rating to remain at the current level, Moody's would expect that Metro's credit metrics show an improvement in 2012 and 2013. In spite of the weak earnings outlook, some deleveraging could be achieved if the company successfully reaches some of its stated targets to improve its cash flow and applies any free cash flow to debt reduction. These targets include, in particular, improving the working capital movement by EUR400 million (versus an outflow of EUR180 million in 2011) and reducing capital spending to EUR1.8 billion, versus EUR2.1 billion reported in 2011. The company has also indicated that its restructuring charges should decrease this year, while we also believe that the company may consider disposing some non-core assets.

Metro's ratings continue to reflect the company's large scale and significant international presence in its key segments, with market leadership in several categories. The ratings also factor in the company's high seasonality which leads to variations in debt metrics during the year, as well as its credit metrics which are expected to remain weak for the rating category, but with some prospects for improvement in the short-term.

The negative outlook reflects Moody's expectation that in spite of stagnant earnings, Metro's metrics should improve somewhat in the current financial year, with the extent of improvement depending on the factors mentioned above. At the same time, Moody's believes that there is very limited headroom under the current rating for any further deterioration in earnings or metrics. Should there be no clear trajectory of debt reduction in the course of the current year, or indeed if earnings continue to deteriorate in coming quarters, we would likely revise Metro's rating downward.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the positioning of metrics at this time, we do not foresee a stabilisation of the outlook in the current financial year. As per our previous guidance, we would consider a stabilisation of the outlook if adjusted leverage were to trend to below 4x with Retained Cash Flow (RCF) to Net Debt at least in the high teens. In this regard, to maintain the current rating we will monitor the company's initiatives to improve credit metrics in coming quarters and achieve a gradual deleveraging. In light of the stagnant earnings outlook, we believe this can only be achieved by solid working capital management, lower capital spending or potential divestments. Although upward pressure on the rating is unlikely at this time, this could occur in the medium term if gross leverage were to trend below 3.5x with RCF/Net debt remaining above 20%. A failure to show an improvement in credit metrics, with gross leverage remaining significantly above 4.0x and RCF/Net debt not improving towards 17%, would likely result in negative pressure on the rating. Any deterioration in the liquidity profile would also likely result in negative pressure on the rating.

PRINCIPAL METHODOLOGY

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

Metro AG, based in Dusseldorf, Germany, is one of the world's largest retailers, and is focused on four major formats: cash & carry wholesale (Metro and Makro brands), food retailing through the Real format, consumer electronics (Media Markt and Saturn), and department stores (Galeria Kaufhof). In 2011, the company reported revenues and EBIT (before special items) of EUR66.7 billion and EUR2.4 billion, respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Richard Morawetz
VP - Senior Credit Officer
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 Metro AG at Baa2; negative outlook
No Related Data.
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