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Rating Action:

Moody's assigns B2 CFR to BrightHouse Group plc; outlook stable

30 Apr 2013

(P)B2 rating assigned to upcoming notes

London, 30 April 2013 --

Moody's Investors Service has today assigned a first-time B2 corporate family rating (CFR) and B2-PD Probability of Default Rating (PDR) to BrightHouse Group plc. The outlook on the rating is stable.

"The assigned B2 rating balances our assessment of the company's scale and fairly high leverage, as well as the potential regulatory and credit risks in the industry, with the company's solid track record of growth and deleveraging in recent years, with reported EBITDA rising to GBP49.4 million in FY2013 from GBP29.4 million in FY2009," says Richard Morawetz, a Moody's Vice President - Senior Credit Officer and lead analyst for BrightHouse.

At the same time, Moody's has assigned a provisional (P)B2 rating (LGD4) to its upcoming senior secured notes due 2018, reflecting the limited amount of senior-ranking debt in the capital structure.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect the rating agency's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the notes. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

--CORPORATE FAMILY RATING AND PROBABILITY OF DEFAULT RATING

In Moody's view, the key constraints to BrightHouse's B2 rating include its small scale and high leverage of approximately 5.8x on a pro forma basis for the transaction and based on FYE2013 earnings, as well as the risks related to potential regulatory changes, to which the broader industry is also exposed. The Office of Fair Trading currently regulates the consumer credit market, and while recent reviews have not had any apparent impact on BrightHouse's earnings, any significant reform to the provision of credit, or to the terms that apply, could impact future growth. Moody's also notes the credit risk associated with the loan book's quality given the long-term nature of contracts and the company's reliance on these contracts for future revenues. In BrightHouse's case, approximately 64% of its FY2013 hire-purchase revenues had been pre-sold as of the beginning of the year. While this should in principle result in stable earnings, it relies on careful control of the credit quality of the loan portfolio. The company reported a bad debt charge of approximately 8% of revenues over the past two years.

The B2 rating also reflects the company's strong track record of growth and deleveraging in recent years, reflecting both its organic growth as well as new store openings. BrightHouse reported 8.3% like-for-like revenue growth in FY2013 (to March), and 7.4% in FY 2012, which is strong compared with rated retail peers, especially in non-food. The company operates 280 stores across the UK, compared with 147 in 2007, with 27 new stores having opened in FY2013 alone. BrightHouse's client base consists largely of low-income earners (approximately 60% are below the UK median income), many of whom are recipients of state benefits. Moody's believes that BrightHouse's fairly unique product offering, notably product rentals over three years with the right to purchase at the end of the contract, differentiates it from most mainstream retailers, while it supplements this offering with optional service and damage liability cover. Moody's nevertheless assesses BrightHouse in the context of the broader retail market, which can represent viable competition insofar as customers can obtain credit financing from other sources, or indeed opt to purchase with no credit.

Moody's deems the company's liquidity to be adequate. Upon closing of the transaction, the company will retain approximately GBP11 million in cash, of which GBP1.7 million is classified as restricted due to solvency requirements reflecting the insurance business and cash held in segregated accounts as a result of voluntary prepayments by customers. The liquidity assessment further assumes that the company will retain access to a Revolving Credit Facility (RCF) of GBP25 million, which is expected to be undrawn at closing. The RCF will retain financial covenants for net debt-to-EBITDA, falling from 6.8x as of June 2013 to 4.1x as of March 2016. On the basis that the notes (and the longer-dated shareholder loans) will represent the company's only debt liabilities, the company is not expected to hold any short-term debt immediately post transaction. The rating agency also expects that the company will retain strong covenant headroom under the RCF at all times. Given the seasonality in cash flows -- with the third quarter seeing a working capital outflow due to higher demand -- Moody's expects that the peak drawing on the RCF will be in that quarter. On this basis, if the RCF were to become inaccessible, Moody's would view the company's liquidity as weak, or potentially inadequate, and this could have rating implications.

-- PROVISIONAL (P)B2 RATING OF SENIOR SECURED NOTES

The provisional (P)B2 rating of the notes, at the same level as the CFR, reflects the limited amount of debt ranking ahead of the notes. The guarantors for the notes and the RCF are the same. However, based on the terms of an inter-creditor agreement, while the liens securing the notes will rank equally with the liens that secure the RCF, in the event of enforcement of the collateral, holders of the notes will receive proceeds only after the lenders under the RCF have been repaid in full.

The GBP220 million in senior secured notes due 2018 will be used to repay existing debt of approximately GBP75 million, certain transaction costs and the repayment of GBP128.8 million of the existing shareholder loan of GBP153.9 million, of which GBP25.1 million will remain outstanding. On this basis, following this transaction and based on FYE2013 results, the company's pro forma gross adjusted leverage is estimated at approximately 5.8x. Moody's has not added back the depreciation of rental assets in calculating EBITDA, in line with management's calculation of EBITDA.

RATIONALE FOR THE STABLE OUTLOOK

Following the transaction, the company will be weakly positioned within the rating category, but Moody's believes that the company's track record of deleveraging will enable it to become more strongly-positioned in the rating category over time. For the rating to be more firmly positioned, gross adjusted leverage would need to trend towards 5x. The assigned B2 CFR reflects Moody's view that, based on past performance, this could be achieved in the next 12-18 months.

WHAT COULD CHANGE THE RATING UP/DOWN

In light of the current rating positioning, upward pressure is unlikely in the current year. However, the rating could be positively impacted if leverage were to fall comfortably below 4.5x with strong liquidity. Conversely, there could be downward pressure if leverage were to rise above 6x on a continued basis, or if liquidity conditions deteriorated. On this basis, there remains limited flexibility within the current rating category.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was the Global Retail Industry published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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.

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.

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 assigns B2 CFR to BrightHouse Group plc; outlook stable
No Related Data.
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