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Rating Action:

Moody's assigns (P)Ba2 to Hornbach's proposed EUR250 million notes issuance

04 Feb 2013

Approximately EUR500 million of rated debt affected

Milan, February 04, 2013 -- Moody's Investors Service has today assigned a provisional (P)Ba2 rating, with a loss given default assessment of LGD3 (46%), to Hornbach Baumarkt AG's proposed EUR250 million of senior unsecured notes due 2020. The company's Ba2 corporate family rating (CFR) and Ba2-PD probability of default rating (PDR) remain unchanged. The Ba2 rating on Hornbach's existing EUR250 million of notes due 2014 is also unchanged. Hornbach will use the proceeds of the new notes to repay in advance the existing notes due 2014. Based in Germany, Hornbach is one of the largest DIY retailers in Europe. The outlook on the ratings is positive.

"Our assignment of the (P)Ba2 rating is in line with Hornbach's CFR and the rating on the existing notes," says Paolo Leschiutta, a Moody's Vice President - Senior Credit Officer and lead analyst for Hornbach. "The positive outlook on the ratings reflects our expectation that despite a weaker-than-expected operating performance in recent months, the company will be able to moderate the deterioration in its credit metrics while achieving a degree of recovery in its operating performance and key ratios over the next 12-18 months."

RATINGS RATIONALE

Specifically, the (P)Ba2 rating assigned to the proposed notes reflects the fact that (1) most of the company's debt is senior unsecured and therefore ranks pari passu with the new notes; and (2) the new notes will have the same seniority as the existing notes. Both the proposed and the existing notes benefit from senior guarantees from Hornbach's operating subsidiaries, which account for almost all of the company's tangible net assets and EBITDA. Moody's will withdraw the rating on the existing notes once they have been fully repaid.

The positive outlook on the ratings incorporates Moody's continued expectation that (1) notwithstanding a lower-than-expected operating performance in its fiscal year ending (FYE) February 2013 which might therefore delay the anticipated strengthening of metrics, Hornbach could remain on a path to a stronger financial profile over the next eighteen months and (2) that the company will maintain a prudent financial policy, including the financing of its capex requirements with internal sources.

Deteriorating economic conditions in some of Hornbach's markets, resulting in pressure on the company's top-line and higher-than-usual store operating costs, led the company to revise its full-year EBIT expectation for its FYE February 2013. While this will exert pressure on Hornbach's credit metrics, Moody's currently expects this pressure to be only temporary, with the company maintaining solid credit metrics and a sound liquidity profile on an ongoing basis. More specifically, Moody's expects the company's financial leverage, measured as debt/EBITDA adjusted for operating leases and pension liabilities, to remain below 5.0x for FYE February 2013, and to show improvements thereafter.

Although Hornbach plans to substitute its existing EUR250 million of notes due 2014 with the new bond issuance, the current outlook also reflects Moody's expectation that the company will use some of its cash reserves to reduce its existing debt. In this context, Moody's notes the company's high cash balance of EUR450 million as of 30 November 2012. The potential reduction in Hornbach's debt, albeit modest, would have a positive impact on the company's credit metrics, compensating for the negative impact of its weak operating performances.

Hornbach's capital structure includes a small amount of secured debt, which comprises amortising mortgage securities that have been replaced, over time, by senior unsecured debt. The secured debt portion of Hornbach's total debt amounted to approximately 10% as of 30 November 2012 and Moody's expects this to reduce further going forward in line with the mortgage amortising schedule. The new notes will be subordinated to this mortgage loan. However, Moody's considers that given the relatively small size of this loan (being less than 10% of the company's capital structure following scheduled amortisation), it will not result in a notching of the notes.

Hornbach's Ba2 CFR continues to reflect (1) the company's relatively small size compared with other European retailers; (2) its high financial leverage for the Ba2 rating category, albeit this is partially offset by a sizeable amount of cash currently available on the company's balance sheet; and (3) the high level of capital expenditure the company is planning in order to expand its network of stores, which limits its free cash flow generation.

However, more positively, the rating also incorporates Hornbach's (1) strong market position in its domestic market; (2) growing international presence; and (3) good track record in executing its strategy, reflected by the company's ability to grow more rapidly than the market through its domestic operations. The rating is also supported by Hornbach's (1) conservative financial policy; (2) flexibility in terms of cutting investments in store openings to adapt to changing market conditions; and (3) solid liquidity profile in light of its high cash balances and full availability under a EUR250 million five-year credit facility due December 2016.

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

WHAT COULD CHANGE THE RATING UP/DOWN

Upward rating pressure could result if Hornbach is able to maintain like-for-like revenue growth in Germany on a sustainable basis and control the volatility of its Eastern European operations, such that its adjusted debt/EBITDA ratio trends towards 4.0x and its EBITA/interest expenses ratio remains above 2.5x.

Moody's could stabilise the outlook if Hornbach fails to demonstrate an improving trend in its profitability early next year. Downward pressure could be exerted on the ratings if Hornbach's financial leverage trends towards 5.5x on the back of declining like-for-like sales and/or margin pressure due to adverse market conditions.

Hornbach is the fourth-largest DIY retailer in Germany by revenues, which amounted to approximately EUR3.0 billion for the 12 months to 30 November 2012. As of the same date, the company operated 137 DIY megastores with garden centres in Europe, the majority of which are located in Germany (91 stores), and benefitted from an increasing presence in other European countries, such as Austria, the Netherlands, the Czech Republic, Slovakia and Romania (the remaining 46 stores). Hornbach's international sales accounted for approximately 42.5% of its total sales as of the nine months ended 30 November 2012.

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.

Paolo Leschiutta
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
Telephone:+39-02-9148-1100

Moody's assigns (P)Ba2 to Hornbach's proposed EUR250 million notes issuance
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