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Rating Action:

Moody's assigns B1 rating to new senior secured notes of Victoria plc, affirms existing ratings; outlook is negative

23 Feb 2021

NOTE: On February 24, 2021, the press release was corrected as follows: In the first paragraph the amount for the backed senior secured notes was changed to €350 million. Revised Release follows.

London, 23 February 2021 -- Moody's Investors Service ("Moody's") has assigned a B1 instrument rating to the new proposed €350 million backed senior secured notes to be issued by Victoria plc, a leading supplier of flooring products. Concurrently, Moody's has affirmed Victoria's B1 corporate family rating (CFR), B1-PD probability of default rating and B1 instrument rating on the existing €500 million backed senior secured notes due 2024. The outlook on all ratings remains negative.

RATINGS RATIONALE

The ratings affirmation is also based on Moody's expectation that the company will use the newly raised debt in combination with equity to fund acquisitions later this year and will adhere to its net leverage policy of 3x. Victoria has established a solid track record of successful growth through acquisitions, including expanding into the hard floor business in Europe in 2018, which somewhat mitigates execution risk. Moody's also positively notes that in November 2020 Victoria received unconditional commitments from its new shareholder Koch Equity Development (KED), a subsidiary of Koch Industries, Inc. (Aa3, stable) to invest up to GBP175 million in the company through convertible preferred shares.

The rating action also reflects Victoria's solid performance despite the coronavirus pandemic. Victoria's flooring products business was severely affected in April-May when coronavirus induced lockdown measures were imposed in all the countries where the company operates. However, a largely flexible cost structure, government-supported furlough schemes, and decisive action by management have enabled the company to stay largely cash neutral during the first lockdown in Spring 2020 and return to positive free cash flow generation shortly afterwards. Trading has since recovered relatively quickly with strong demand supporting sales which has been higher last year's levels since summer. Victoria benefits from its focus on residential improvement and repair segment which has been largely resilient as consumers have used this period to improve their homes.

However, Moody's forecasts GDP for the UK and major euro area economies to reach pre-pandemic level in 2022-23 only. In addition, the short-term risks remain to the downside as persistent virus fears and repeated outbreaks may limit recovery in demand. A sizeable share of Victoria's clients are small and mid-size companies, and these are more at risk the longer the pandemic persists, although Moody's understands there has not been any significant increase in bad debts so far.

The B1 CFR also reflects Victoria's: (1) leading positions within the fragmented European soft flooring and ceramic tiles markets; (2) focus on independent retail channels with greater customer diversity and pricing power; (3) low exposure to the new construction segment; and (4) solid cash flow generation ability.

The rating also reflects the company's (1) rapid pace of change through a recent history of transformative acquisitions; (2) activities in mature markets with limited growth and competitive pressures; (3) sale of consumer discretionary items with exposure to the economic cycle; and (4) raw material and currency exposures.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Victoria's operating performance has been resilient, but may be impacted should the pandemic lead to increased risk of business insolvencies and lower demand.

The company is LSE listed and subject to the UK Corporate Governance Code. The company's Board includes six members, including four non-executive directors. Geoffrey Wilding, the Executive Chairman, and Zachary Sternberg, a non-Executive Director and co-founder of the Spruce House Partnership, represent two largest shareholders who jointly own 38.2% of the company's shares.

LIQUIDITY

The company's liquidity is good with around GBP130 million of cash on the balance sheet as of 3 October 2020 before taking into accounts KED's preferred equity and new notes proceeds. In addition, Victoria's liquidity benefits from fully undrawn GBP75 million revolving credit facility (RCF) due December 2024. Moody's expects the company to generate positive free cash flows of circa GBP30-40 million per annum. The RCF is subject to a net leverage springing covenant that is tested when the RCF is over 40% (i.e. GBP30 million) drawn.

STRUCTURAL CONSIDERATIONS

The company's existing and proposed senior secured notes are rated B1, in line with the CFR. A GBP75 million super senior RCF ranks ahead of the notes. There is also other debt within the company's financial structure, largely relating to pension obligations and deferred consideration, which is expected to increase driven by future acquisitions. Security largely comprises share pledges and a debenture over assets in the UK and Australia, and guarantees are provided from material companies representing at least 80% of turnover, EBITDA and gross assets. KED's investment through convertible preferred shares meets Moody's equity criteria.

RATING OUTLOOK

The negative outlook reflects the uncertainties regarding the recovery from the pandemic crisis and a degree of execution risk in regard to the prospective acquisitions. The outlook also assumes that the company will focus on adhering to its financial policy of maintaining net reported leverage at below 2.0x on a steady state basis and below 3.0x to finance acquisitions.

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

Upward rating pressure would not arise until the coronavirus outbreak is brought under control and major confinement measures are lifted. Over time an upgrade in the ratings would require a further period of growth in revenues and profitability. Quantitatively the ratings could be upgraded if Moody's-adjusted leverage reduces sustainably below 3.5x, with free cash flow / debt above 10% and the company maintaining satisfactory liquidity.

The ratings could be downgraded if Moody's-adjusted leverage remains above 5x for a sustained period, if free cash flow / debt reduces towards zero for a sustained period, or if liquidity concerns arise.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Consumer Durables Industry published in April 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060509. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Victoria plc was founded in 1895 in the United Kingdom, and is an international designer, manufacturer and distributor of flooring products across carpets, ceramic tiles, underlay, luxury vinyl tile, artificial grass and flooring accessories. Victoria is listed on AIM in London with a market capitalisation of GBP878 million (as of 18 February 2021). In fiscal 2020 the company generated GBP622 million of revenue and GBP118 million of company adjusted EBITDA.

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 EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU 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.

Egor Nikishin, CFA
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Richard Etheridge
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

No Related Data.
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