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Rating Action:

Moody's affirms Metro AG's rating at Baa3; stable outlook

17 Mar 2014

London, 17 March 2014 -- Moody's Investors Service has today affirmed the Baa3 long-term issuer rating, the senior unsecured ratings ((P)Baa3/ Baa3) and the Prime-3 (P-3/ (P)P-3) short-term ratings of Metro AG (Metro), as well the ratings at METRO Finance B.V. The outlook remains stable.

"The affirmation of Metro's ratings, with a stable outlook, reflects the fact that the company's credit metrics as of the end of the short financial year 2013 have improved slightly when adjusted for the seasonal effect of the change in financial year end from December to September, although remaining fairly weak for the rating category," says Sven Reinke, a Moody's Vice President -- Senior Analyst and lead analyst for Metro. "Lower EBITDA contribution in LTM09/2013 was offset by a reduction in reported debt as a result of proceeds from the divestment of the Real hypermarkets in Eastern Europe. We have adjusted our rating guidance for Metro in line with the change of the financial year end date," adds Mr.Reinke.

RATINGS RATIONALE

Today's rating affirmation reflects Moody's view that Metro's measures to reduced leverage driven by proceeds from the divestment of the Real hypermarkets in Eastern Europe and improved cash flow generation as a result of reduced capital expenditure have benefited the company's credit metrics.

For the short financial year to September 2013, Metro reported EBIT before special items of EUR728 million, up from EUR706 million. However, EBIT before special items declined slightly, excluding higher income from real estate divestments. Metro has attributed this weakening to price investments and the challenging market environment in Europe, which has resulted in a greater restraint in consumer spending, particularly in the euro area's periphery countries. The special items reduced materially to EUR25 million (EUR297 million in the nine months to September 2012) as EUR103 million incurred in the Cash & Carry division related mainly to the repositioning and streamlining of the non-food assortment was largely offset by EUR119 million of positive special items from the divestment of Real's Eastern European business.

Reported net debt decreased materially to EUR5.4 billion in September 2013 versus EUR7.7 billion in September 2012; total debt decreased by about EUR1.9 billion, while the cash balance increased by EUR0.5 billion, reflecting proceeds from the sale of the Real business in Eastern Europe. However, if compared with December 2012, net debt increased driven by the seasonal pattern of Metro's cash flows.

Accordingly, the gross debt/EBITDA metric (as adjusted by Moody's) for LTM 09/2013 was about 5.4x versus 5.2x in the last financial year. Moody's notes that on average over the past 6 years, Metro's gross leverage metric was about 30 basis points higher in September versus December. Whilst the nominal increase in the gross debt/EBITDA metric from 5.2x at December 2012 to 5.4x for LTM September 2013 is slightly below the seasonal effect of a 30 bps increase, Moody's consider the metric still fairly weak for the current rating. The ratio of adjusted retained cash flow/net debt improved slightly to around 14.7% for LTM September 2013 from 13.7% in December 2012.

The company has guided for stable like-for-like sales, a slight rise in overall sales in local currency and adjusted for portfolio measures and slightly improved EBIT before special items of EUR1.75 billion in financial year 2014 versus the same period last year (EUR1.7 billion). However, this EBIT guidance excludes the contribution from real estate gains and portfolio changes of about EUR300 million in 2013. Driven by a reduction in sales in local currency by 1.4%, Metro's earnings deteriorated in the first quarter of FY2014 (EBITDA before exceptional items down 16.9% as reported). The company attributed this weakening mainly to the earnings recorded in the previous year related to real estate transactions, the lack of contributions from Real Eastern Europe and lower contribution from Media-Saturn.

Metro announced that it is preparing for the IPO of up to 25% of the shares in Metro Cash & Carry Russia. Depending on market conditions, the IPO on the London Stock Exchange is planned for the first half of 2014. Moody's expects that a partial IPO would have a credit positive impact on adjusted debt, on the basis that the company uses the proceeds to reduce its net debt.

Metro's Baa3 rating reflects its strong business profile as one of the largest retailers in the world, underpinned by its geographic and business diversity, with operations in 32 countries as of December 2013. In the short financial year 2013, sales generated outside Germany accounted for around 61% of the group's total turnover.

The stable outlook reflects Moody's view that Metro's earnings trend will at least stabilise in 2014, with the potential for improvement in light of the rating agency's current expectation for stronger economic growth in the euro area versus 2013. To maintain the current rating and stable outlook, Moody's would expect the company to achieve and sustain gross adjusted leverage below 4.8x and RCF/net debt of at least 12.5% over the next 12-18 months. The rating agency considers that financial metrics allow limited headroom in the rating category.

WHAT COULD CHANGE THE RATING UP/DOWN

Although upward pressure on the rating is unlikely at this time, this could occur if Metro's gross leverage were to trend towards 4.0x, with RCF/net debt above 16% on a sustainable basis while sustainably maintaining a satisfactory liquidity profile.

Conversely, negative rating pressure would likely occur if Metro's gross leverage were to exceed 4.8x and RCF/net debt falls below 12.5% on a continued basis as of September year end. Any deterioration in the company's liquidity profile would also likely result in negative pressure being exerted on the rating or outlook.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings 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.

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 the short financial year 2013, the company reported revenues and EBIT (before special items) of EUR46.3 billion and EUR728 million, 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.

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 Metro AG's rating at Baa3; stable outlook
No Related Data.
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