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Rating Action:

Moody's assigns first-time B2 corporate family rating to Decomeubles Partners; negative outlook

16 Jun 2014

London, 16 June 2014 -- Moody's Investors Service has today assigned a first-time B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) to Decomeubles Partners SAS (Decomeubles), the direct holding company of BUT SAS (BUT). Concurrently, Moody's has assigned a provisional (P)B3 rating, with a loss given default (LGD) assessment of LGD4, 63%, to the proposed EUR170 million worth of senior secured notes due 2019 to be issued by BUT. The outlook on the rating is negative.

The proceeds from the proposed issuance will be used to (1) repay almost all existing debt, including a mezzanine facility and a shareholder loan; and (2) fund a reduction of the share capital of Decomeubles, and related refinancing fees and expenses.

"The B2 rating reflects the group's relatively modest size and French market concentration, exposure to discretionary spending, weak profitability levels and high leverage", says Marie Fischer-Sabatié, a Moody's Vice President - Senior Credit Officer and lead analyst for BUT. "However this is mitigated by BUT's extensive store network, good brand recognition and growing market share in the fragmented French home equipment market", adds Ms Fischer-Sabatié.

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. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

--B2 CFR/B2-PD PDR--

The B2 CFR reflects BUT's modest size compared with other rated retail peers and the full reliance of its operations upon the French market. The rating also captures a risk of operating volatility as customers tend to reduce their discretionary spending in economic downturns. BUT's profitability lags behind its main peers, with an EBITDA margin in the high single digits in percentage terms reflecting (1) a less profitable product mix than peers (including lower margin products such as white and brown goods); and (2) continuous pressure on margins, against the backdrop of the very competitive French home equipment market.

Furthermore, the B2 rating factors in a high leverage -- defined as debt/EBITDA, after Moody's adjustments principally for capitalised operating leases -- which the rating agency estimates will be close to 6.5x at the end of the current financial year pro forma for the refinancing. This level is deemed by Moody's to be stretched and positions the company weakly in its rating category. Franchisees acquisitions have been used by BUT as a means to defend competitive positions and have weighed on its financial profile. Moody's may not exclude the possibility of further acquisitions. In particular, BUT's largest franchisee has a put option on the 18 stores that it operates which can first be exercised in November 2015 and could potentially further constrain, if not deteriorate, the company's credit metrics.

More positively, the B2 rating acknowledges BUT's long established presence in the French home-equipment market. The company has the largest home-equipment retail network in France, with 258 stores expected at the end of March 2014, of which 176 are fully owned and 82 under franchisee agreements. Since its creation in 1972, it has built a well-known brand name in France, especially in secondary cities and rural areas where its stores are mostly located. BUT ranks third in the French home equipment market and continuous market share gains illustrate a successful marketing and operational strategy since its acquisition in 2008. Since then the company also managed to shift its product range towards a more profitable mix, including more furniture and decoration items. However, the very competitive market puts negative pressure on the company's operating performance, as was the case in the financial year ended June 2013.

We expect BUT to have cash of around EUR55 million post-refinancing. Given the seasonality of its working capital requirements, BUT is reliant upon external sources of liquidity, in particular in the peak Christmas and January sales periods, when it will have access to a new EUR30 million revolving credit facility, including a financial covenant (with an expected leeway around 35-40%). Moody's cautions that BUT's liquidity is not adequately sized to fund the potential acquisition of its largest franchisee, should it exercise its put option in November 2015 and that it would need to put additional financing in place to fund this cash outflow.

The PDR of B2-PD reflects the use of a 50% family recovery assumption, consistent with a capital structure including a mix of bond and bank debt.

--(P)B3 RATING ON SENIOR SECURED NOTES--

The (P)B3 rating (LGD4, 63%) assigned to the company's proposed senior secured notes due 2019 reflects their position behind a committed EUR30 million super senior revolving credit facility and a significant amount of trade payables, which are both ranked ahead of the senior secured notes in our waterfall. The proposed notes and the RCF will ultimately benefit from a similar maintenance guarantor package, including upstream guarantees from guarantor subsidiaries representing approximately 95% of BUT's consolidated EBITDA. Both instruments will also be secured, on a first-priority basis, by certain share pledges, intercompany receivables, bank accounts and certain inventory of BUT International S.A.S.. However, the notes will be contractually subordinated to the RCF with respect to the collateral enforcement proceeds. Moreover, Moody's cautions that there are significant limitations on the enforcement of the guarantees and collateral under Luxembourg and French law.

Both the notes and amended bank debt contain portability features, which allow for a one-off change in ownership of BUT without triggering change of control provisions subject to meeting certain tests, which, according to Moody's estimates, will be met immediately following the refinancing.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the company's weak credit metrics for its B2 rating, with high leverage expected around 6.5x for FYE June 2014 (pro forma the refinancing). It also reflects (1) some execution risks relating to the strategy being implementing by the new management (e.g. supply chain rationalisation, store openings and efficiency improvements) and (2) the still limited prospects for growth in BUT's market, which could hamper the deleveraging path of the company.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could consider stabilizing BUT's outlook, if its ratio of adjusted (gross) debt/EBITDA reduces towards 6x. We could upgrade the rating if BUT makes evidence of its ability to (1) sustainably enhance its profitability while (2) maintaining market shares and (3) sustaining positive free cash flow post acquisitions. Quantitatively, stronger credit metrics, such as adjusted (gross) debt/EBITDA below 5.5x on a sustainable basis, could trigger an upgrade.

We could downgrade the ratings if BUT's cash consumption in capex and acquisitions was to exceed the group's cash from operations for a sustained period of time as a result of a weakened operating performance or higher-than-expected investments. Quantitatively, an adjusted (gross) debt/EBITDA ratio remaining above 6.5x for a prolonged period could trigger a downgrade. Any weakening of the liquidity profile would also exert immediate downward pressure on the rating.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings 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.

Headquartered in France (Emerainville), BUT is one of France's largest home equipment retailers, with revenues of EUR1.2 billion in FYE June 2013. BUT's business model is based on a one stop shop concept, offering its customers furniture, electrical/home appliances and home decoration products. In FYE June 2013, furniture, electrical goods and decorative products represented 63%, 30% and 7% of BUT's store revenues, respectively.

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.

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.

Marie Fischer-Sabatie
VP - Senior Credit Officer
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Eric de Bodard
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 first-time B2 corporate family rating to Decomeubles Partners; negative outlook
No Related Data.
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