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Related Issuers
Rating Action:

Moody's assigns Ba2 rating to Hornbach's proposed senior unsecured notes

14 Oct 2019

Paris, October 14, 2019 -- Moody's Investors Service ("Moody's") has assigned a Ba2 rating to the proposed senior unsecured notes to be issued by Hornbach Baumarkt AG ("Hornbach" or the "company"), the German DIY-store chain. The proposed notes will be fully and unconditionally guaranteed by Hornbach International GmbH. The proceeds of the EUR-denominated notes, expected to be a maximum EUR250 million, will be used to refinance the existing EUR250 million senior unsecured notes due February 2020 and for general corporate purposes. The proposed notes will rank equal to Hornbach's existing senior unsecured notes.

The company's Ba3 corporate family rating (CFR) and Ba3-PD probability of default rating (PDR) remain unchanged. The Ba2 rating on Hornbach's existing EUR250 million of notes due 2020 is also unchanged. The outlook on the ratings is negative reflecting Moody's expectations that the company's leverage will increase to around 5.5x in fiscal 2019, which weakly positions Hornbach in the Ba3 rating category.

RATINGS RATIONALE

The Ba2 rating assigned on the proposed notes is one notch higher than Hornbach's Ba3 CFR because the notes benefit from senior guarantees from Hornbach's operating subsidiaries, while the company's exiting promissory notes are not guaranteed by Hornbach's operating subsidiaries and therefore subordinated to the senior unsecured notes.

Hornbach proposed issuance constitutes a proactive step in managing the company's upcoming bond maturity of EUR250 million due in February 2020. Moody's will withdraw the rating on the existing notes once they have been fully repaid.

The company's plan to refinance its existing notes is credit neutral because Moody's already anticipated that the company would issue additional debt during the August 2019 downgrade of the CFR to Ba3 from Ba2.

The Ba3 CFR is supported by (1) the company's strong position in its domestic market and good geographical diversification across Europe; (2) positive underlying growth, as reflected by Hornbach's ability to outperform the market; and (3) a good liquidity profile, which is underpinned by the company's commitment to maintain a conservative financial policy.

However, Hornbach's Ba3 CFR is constrained by (1) the company's low margins due to intense competition in the do-it-yourself (DIY) industry in Germany and the high level of digitalisation costs; (2) its relatively small size compared with other European retailers; and (3) the high level of capital spending associated with new store openings, which leads to negative free cash flow (FCF) generation.

The negative outlook reflects Moody's expectations that the company's leverage will increase to around 5.5x in fiscal 2019 and that that the company will need to sustainability grow its revenues and earnings over the next 12 to 18 months to reduce leverage towards 5.0x, a level which is commensurate with the current Ba3 CFR.

The outlook could be stabilized if the company shows evidence that Moody's adjusted debt/EBITDA will trend towards 5.0x driven by an ongoing and sustainable increase in earnings and improvement in the company's FCF and interest cover, which are currently weak.

WHAT COULD CHANGE THE RATING UP/DOWN

The company is weakly positioned in the Ba3 rating category and as such, an upgrade is unlikely in the short term. Upward pressure on the ratings in the medium term could be exerted as a result of Hornbach's financial leverage decreasing below 4.5x on a sustained basis. A higher rating would also require the company to strengthen its Moody's adjusted EBIT margin above 4% on a sustained basis and the generation of positive FCF.

Conversely, downward pressure could be exerted on the ratings as a result of Hornbach's financial leverage failing to trend towards 5.0x supported by growing underlying revenues and profits. Downward pressure could also be exerted if interest cover decreases below 1.5x, if FCF remains negative and if the company's liquidity deteriorates.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

CORPORATE PROFILE

Hornbach Baumarkt AG (Hornbach) is a mid-sized DIY retailer mainly operating in Germany, with 97 stores as of the end of fiscal 2018, and other European countries, including Austria (14), the Netherlands (14), the Czech Republic (10), Switzerland (7), Romania (6) Sweden (6), Slovakia (3) and Luxembourg (1). The company reported sales of €4.1 billion as of the end of fiscal 2018.

Hornbach's shares are listed on the Frankfurt Stock Exchange. Hornbach's parent company, Hornbach Holding AG & Co. KGaA, owns 76.4% of Hornbach's share capital, while independent investors own 23.6%. In turn, the Hornbach family owns 37.5% of Hornbach Holding's total share capital, and the remaining 62.5% are free float.

REGULATORY DISCLOSURES

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.

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.

Francesco Bozzano
Asst Vice President - Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Jeanine Arnold
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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