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Rating Action:

Moody's assigns first time Baa1 issuer rating to Sodexo

08 Apr 2021

Paris, April 08, 2021 -- Moody's Investors Service ("Moody's") has today assigned a Baa1 long-term issuer rating to Sodexo SA (Sodexo), one of the world's largest providers of contract catering, facilities management and employee benefit voucher services. The outlook is stable.

"The Baa1 rating with a stable outlook assumes that Sodexo will be successful in largely offsetting the negative long-term effects of the coronavirus pandemic on its earnings, notably more frequent remote working, although the strategic recovery plan entails execution risks", says Eric Kang, a Moody's Vice President -- Senior Analyst and lead analyst for Sodexo. "We also assume the company's Moody's-adjusted EBITA margin will gradually recover to around 6% which, combined with our expectation that Sodexo will maintain a conservative financial policy and very good liquidity, will restore key credit metrics to levels more commensurate with a Baa1 rating by fiscal 2023", adds Mr Kang.

RATINGS RATIONALE

Sodexo's Baa1 long-term issuer rating reflects the company's strong business profile, which is underpinned by leading positions in contract catering, facilities management and employee benefit voucher services in markets globally, as well as the resilience of these markets through past economic cycles. The rating is also supported by the company's conservative financial policy, reflecting a disciplined approach to shareholder returns and acquisitions, and very good liquidity and prudent cash management in the Benefits and Rewards Services (BRS) activity. Other governance considerations that support the rating include the family ownership which enables the company to adopt a long-term vision for the business with a corporate governance structure, which adequately protects the interests of all stakeholders.

However, the Baa1 issuer rating is weakly positioned, reflecting uncertainty over the pace of the recovery in the company's earnings and credit metrics to pre-coronavirus crisis levels, as well as negative structural changes, such as an increase in remote working, which Moody's views as a social risk. Sodexo is taking actions to mitigate the short-term and long-term disruptions of the pandemic such as introducing new catering formats and headcount reduction, but there are execution risks.

Under Moody's base case forecasts, earnings will not recover to pre-crisis levels before fiscal year 2023 (ending 31 August 2023). The rating agency expects Moody's-adjusted debt/EBITDA to gradually reduce towards 3.0x in fiscal year 2023, which are levels more commensurate with a Baa1 rating, from a peak level of 6.5x-7.0x in fiscal year 2021. The recovery in earnings from fiscal 2022 should also lead to visibly positive Moody's-adjusted free cash flow. The rating agency expects Moody's-adjusted free cash flow will be around breakeven in fiscal 2021, despite the cancellation of dividends, but thereafter improve to around €400 million or above per annum. The weak cash flow in 2021 is due to continued weak earnings, high restructuring charges related to the new cost savings programme, the reversal of deferred social charges and tax payments, and reimbursements of hospitality packages for the Tokyo 2020 Olympic Games.

LIQUIDITY

Sodexo's liquidity is good. As of 28 February 2021, the company had unrestricted cash of around €2.2 billion (€3.3 billion including restricted cash and financial assets at BRS). A further liquidity buffer is provided by unused revolving credit facilities (RCF) and bilateral facilities of around €1.9 billion in aggregate. RCFs of €589 million and $785 million both mature in July 2025. Two bilateral facilities of €150 million each mature in December 2023, while a third totalling €150 million will mature in February 2024. There is no financial maintenance covenant following the repayment of US private placement debt in July and August 2020. The main debt maturity through fiscal 2022 is a €600 million bond due in January 2022..

ESG CONSIDERATIONS

The main social consideration incorporated in Sodexo's ratings relate to potential changes in consumer habits following the coronavirus pandemic, which could lead to footfall remaining below pre-crisis levels in certain locations (e.g. offices and universities). Other social considerations include the company's high level of personnel expenses (around half of revenue), which makes the company vulnerable to changes in local labour laws.

Governance considerations considered in Sodexo's rating include the company's family ownership. Members of the Bellon family control the majority of voting rights, and three family members sit on the board of directors, one of whom is also chairwoman. Moody's believes that the family ownership enables the company to adopt a long-term vision and strategy for the business. The current corporate governance structure is geared to protect the interests of all stakeholders.

RATING OUTLOOK

The stable outlook assumes Sodexo will be successful in largely offsetting the negative long-term effects of the coronavirus pandemic on its earnings, although the strategic recovery plan entails execution risks. It also assumes the company's Moody's-adjusted EBITA margin will gradually recover to around 6% which, combined with our expectation that Sodexo will maintain a conservative financial policy and very good liquidity, will restore credit metrics to levels more commensurate with a Baa1 rating by fiscal 2023.

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

Upward rating pressure could materialise if the recovery strategy is successful, enhancing the company's good geographic diversity and historical business resilience. More quantitatively, Moody's could consider upgrading the rating if Moody's-adjusted debt/EBITDA is comfortably below 3.0x on a sustained basis, Moody's-adjusted retained cash flow/net debt is sustainably around 30% or above, and the company continues to maintain a conservative financial policy, including strong liquidity and a current assets/current liabilities ratio in the voucher business of above 100%.

Downward rating pressure could materialise if there is evidence of a severe shift in sector dynamics and customer behaviour, leading to revenue and earnings remaining well below pre-crisis levels, or if the company fails to successfully execute the strategic recovery plan. These outcomes would lead to a weaker business profile than currently factored into the rating and outlook. More quantitatively, Moody's could consider downgrading the rating if Moody's-adjusted debt/EBITDA is expected to remain sustainably above 3.5x by fiscal 2023 or Moody's-adjusted retained cash flow/net debt is sustainably below 20%. Downward rating pressure could also materialize if the company adopts a more aggressive financial policy than currently reflected in the rating, notably with respect to shareholder returns, acquisitions, and excess cash levels and cash management in the voucher business.

Moody's gross leverage ratio target for the rating is based on the assumption that the company will maintain a cash balance of at least around €1.5 billion over time. Moody's would consider additional cash above this level as excess cash to be used as liquidity buffer or for refinancing purpose, which creates some flexibility for a tolerance of gross leverage above 3.5x.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Business and Consmer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Sodexo is one of the world's largest providers of contract catering, facilities management and employee benefit voucher services. The company is present in 64 countries, with the US, France, Brazil and the UK among its largest markets.

The company, which generated revenue of around €19 billion in its fiscal year ended 31 August 2020, has been listed on the Euronext Paris stock exchange since 1983. The largest shareholder is Bellon SA, the family holding company of founder Pierre Bellon, with a stake of 42.8% and voting rights of 57.1% as of 31 August 2020.

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 rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is 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_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Eric Kang, CFA
Vice President - Senior 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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