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Rating Action:

Moody's assigns Caa2 CFR to Hema post restructuring; stable outlook

29 Oct 2020

Paris, October 29, 2020 -- Moody's Investors Service ("Moody's") has today assigned a Caa2 corporate family rating (CFR) to Helix Holdco S.A. ("Hema" or "Company") and a Caa2-PD probability of default rating (PDR). Concurrently, Moody's affirmed the B2 rating to the EUR42 million guaranteed new money private placement notes (PPNs) issued by Hema B.V., the Caa2 rating to the EUR305 million guaranteed senior secured notes (SSNs) issued by Hema Bondco I B.V. and the Ca rating to the EUR120 million pay-in-kind (PIK) Notes issued by Helix Holdco S.A. The outlook has been changed to stable from negative for Hema B.V. and HEMA Bondco I B.V., and assigned stable for Helix Holdco S.A.

Moody's has also withdrawn Hema B.V.'s ratings pre-restructuring, including Hema B.V.'s Ca CFR and C-PD/LD PDR, the Caa3 rating to the previous EUR600 million guaranteed senior secured notes issued by Hema Bondco I B.V. and the C rating to the EUR150 million guaranteed senior unsecured notes issued by Hema Bondco II B.V.

RATINGS RATIONALE

The Caa2 CFR rating reflects the completion of Hema's debt restructuring transaction, on 19 October 2020. The restructuring resulted in a reduction in the existing SSN from EUR600 million to EUR305 million and a complete write-off of the EUR150 million existing senior notes. The transaction also resulted in a change of the existing shareholder holding structure with the owners of the existing SSNs becoming the new shareholders of Hema. The SSN holders also obtained the PIK notes of EUR120 million.

Moody's believes that the Caa2 CFR is strongly positioned given the company's strong financial metrics for the current rating level, namely a Moody's adjusted debt/ EBITDA expected to reach around 6x in fiscal 2021 and a Moody's Adjusted EBIT Margin expected to reach 3.9% in fiscal 2021.

However the trading environment of the company remains challenging and the CFR is unlikely to transition to a higher level until the company demonstrates sustainable sales and earnings growth and the company looks likely to successfully execute on its strategy. The CFR is also constrained by (1) the company's limited liquidity buffer and the expectation of negative free cash flows in the next 12 to 18 months, (2) the still weak, albeit improved, EBIT/interest cover ratio expected to be below 1.0x in the next 12 to 18 months, (3) challenging trading conditions in the European apparel and non-food retail market, owing to the coronavirus pandemic, intense online and offline competition and the expected deterioration in consumer sentiment; (4) execution risk around the company's plans to reduce costs and to grow online and internationally; and (5) uncertainty around the future ownership and governance of the group as the company reached a conditional agreement with the Consortium regarding the sale of Hema B.V.

The Caa2 CFR follows the successful restructuring and reflects: (1) the EUR337 million debt reduction (39% of the Hema's existing debt) leading to an expected gross leverage of EUR530 million in 2021 (including the EUR120 million PIK notes); (2) the improvement in the company's liquidity thanks to the new money PPNs and the reduction in the company's interest payments post restructuring; and (3) Moody's expectation that Hema's sales and EBITDA will gradually recover in the next 12 to 18 months after the significant decline in Q1 2020 caused by the coronavirus pandemic. The CFR continues to reflect Hema's established market position in the Netherlands and its diversified product offering.

Moody's understands that Hema entered into a conditional agreement with a consortium of potential buyers (the Consortium) for the sale of Hema B.V. This agreement is subject to the Consortium obtaining financing for its offer corresponding to an enterprise value of EUR470 million (still subject to change), which would allow the full pre-payment of the PPNs and the SSNs and a partial repayment of the PIK. If the sale agreement of Hema to the Consortium is finalized, and the senior secured notes are likely to be fully repaid, Moody's would expect a higher recovery compared to what is currently implied by the Caa2 rating on the notes.

Hema's sales and EBITDA partially recovered in Q2 2020 reaching a like for like sales decline of only 1.5% compared to the previous year and an EBITDA (excluding restructuring expenses), which was 2.5% lower compared to the same quarter last year. Moody's expects Hema's sales and EBITDA will continue to recover in second half of 2020 from the low point reached in the first quarter of 2020. Moody's expects Hema's EBITDA will continue to grow in the next 12 to 18 months reaching a Moody's adjusted leverage of 6x in fiscal 2021 because Moody's expects that in the absence of further full scale, national lockdowns, that there will be an easing of the effects caused by the coronavirus pandemic and that the company will continue to grow its e-commerce and its wholesale operations. A new lockdown, further decreases in consumer confidence or restrictive social distancing measures especially in Benelux are key downside risks to our base case.

LIQUIDITY

Hema's liquidity is adequate with a cash balance of approximately EUR144 million. The company's liquidity will benefit from lower interest payments after the transaction but Hema's free cash flows are expected to remain negative in the next 12 to 18 months as the company will increase its capital expenditure to replace the store locations sold to Jumbo in 2019. These negative free cash flows will be to a large extent offset by payments due to be received in 2021 from the store locations sold to Jumbo. Moody's expects Hema to start generating positive, albeit limited, free cash flows from 2022. The company's cash flow is seasonal, and cash on balance sheet is typically at a low point at the end of the first half of the fiscal year.

Hema's revolving credit facility (RCF) is subject to a minimum EBITDA covenant, set at EUR35 million and increasing over time, and a minimum liquidity covenant set at EUR30 million. Moody's expects Hema to maintain sufficient headroom under these covenants. A breach of the RCF covenants would result in a default under the RCF terms and conditions.

STRUCTURAL CONSIDERATIONS

Hema's CFR is positioned at Helix Holdco S.A. so that all corporate family rated instruments are included including the PIK Notes.

Moody's PDR is Caa2-PD, reflecting a 50% loss given default assumption. The PPNs are rated three notches above the CFR reflecting their senior priority in the enforcement waterfall and the cushion provided by the SSNs and the PIK Notes. The Caa2 rating on the SSNs reflects their subordination to the PPNs and to the EUR80 million super senior revolving credit facility, of which EUR10 million was undrawn at closing of the transaction, and its seniority vis a vis the PIK Notes.

The Ca rating on the PIK Notes reflects the contractual and structural subordination of the instrument as the PIK notes have been issued by Helix Holdco S.A., a holding company outside the restricted group.

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

Upward pressure on the ratings could arise if the company achieves a sustainable recovery in profitability, improves its liquidity position and maintains an EBIT/interest coverage sustainably above 1.0x.

Downward pressure on the ratings could arise if (i) liquidity diminishes materially from post transaction levels including if EBIT/interest expense deteriorates well below 1x; (ii) Hema's operating performance weakens; (iii) if the company does not deleverage from its current levels.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Hema is a general merchandise retailer, operating a network of 774 stores as at the beginning of March 2020 principally in Benelux with a presence in France, Germany, Spain, Austria and the UK. In 2019, Hema generated net sales of EUR1.3 billion and adjusted EBITDA of EUR105 million. Since 19 October 2020, Hema is owned by the senior secured notes holders following the restructuring transaction.

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_1133569.

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.
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