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Global Credit Research - 09 Oct 2017
London, 09 October 2017 -- Moody's Investors Service has today assigned a first-time Baa2
long-term issuer rating to Esselunga S.p.A.
("Esselunga"). Concurrently, Moody's has assigned
a Baa2 senior unsecured rating to Esselunga's proposed senior unsecured
bonds of up to EUR 1 billion. The outlook on the ratings is negative.
"The Baa2 long-term issuer rating reflects Esselunga's well-established
position as Italy's fourth-largest grocery retailer position
and its defensive business profile" says Ernesto Bisagno, a Moody's
Vice President - Senior Credit Officer and lead analyst for Esselunga.
"The rating also reflects the strong financial metrics offsetting
the lack of international diversification", adds Mr Bisagno.
RATINGS RATIONALE
Esselunga's Baa2 long-term issuer rating reflects the company's
(1) defensive business profile and low seasonality; (2) well-established
position as Italy's fourth-largest grocery retailer;
(3) exposure to some of the wealthiest parts of Italy; (4) strong
track record in generating stable, above-average returns
for the sector, with a Moody's-adjusted EBIT margin
of 6.1% in 2016; (5) relatively low level of adjusted
debt and conservative financial policy; (6) expectation that free
cash flow (FCF) generation (after capital spending and dividends) will
remain marginally positive despite the material investment programme.
The rating also reflects the company's (1) lack of international
diversification and hence reliance on the economic conditions in Italy,
although Moody's notes the company's resilient performance during
the financial crisis; (2) relatively smaller size and higher geographical
concentration than other rated European retailers.
Moody's expects macroeconomic conditions to be supportive of Esselunga's
operating performance, also in light of the company's exposure
to some of the wealthiest parts of Italy. However, the lack
of diversification outside Italy could impair growth and leaves Esselunga
exposed to the volatility in the domestic economy.
Moody's anticipates leverage (Moody's adjusted gross debt
to EBITDA) at December 2017 to be 2.3x. The calculation
includes around EUR 1.3 billion of debt of which almost EUR 900
million funding the acquisition of the 67.5% stake in Villata
Partecipazioni S.p.A. ("Villata Partecipazioni"),
and EUR 417 million of adjustments for operating leases and pensions.
In addition, the rating agency notes the existence of EUR 300 million
of debt at the level of the holding company Supermarkets Italiani SpA
(Supermarkets) and the significant minority stake of 32.5%
in Villata Partecipazioni. While the EUR 300 million debt is not
factored in Moody's credit metrics, the holding company Supermarkets
largely relies on dividend payments from Esselunga to service the debt.
Positively, this is mitigated by the conservative financial policy
with management focused on maintaining a level of reported net debt to
EBITDA below 1.5x.
Moody's anticipates Esselunga to continue to grow its sales each
year in the low-to-mid single digit range (as a combination
of positive organic growth and contribution from its new stores) and maintain
relatively stable margins, supporting steady operating cash flow
generation.
Moody's expects FCF generation to be broadly neutral in 2018,
owing to discretionary capex plan and working capital needs due to changing
value-added tax payables, and to improve in 2019-20
at EUR 50 million- EUR 100 million each year. As a result,
Moody's expects leverage to decline marginally towards 2.2x by
2019, with the decline driven by a combination of higher EBITDA
and stable gross debt. On a reported net debt to EBITDA calculation,
that would be equal to 1.3x in 2019, down to 1.1x
in 2020, within the company's targets to maintain reported
net leverage below 1.5x.
LIQUIDITY ANALYSIS
Moody's views Esselunga's liquidity profile as good,
underpinned by the existing cash in excess of EUR 200 million and limited
refinancing needs until their bilateral revolving credit facilities of
EUR 300 million mature in August 2022. Moody's understands
that those facilities do not contain any material restrictive covenants.
The liquidity assessment assumes that the company will complete the refinancing
of the EUR 900 million facility on the capital markets. In addition,
Moody's liquidity analysis takes into account the expectation that
FCF will be neutral in 2018 and marginally positive in 2019, and
factors in modest seasonality and limited working capital volatility over
quarters.
RATIONALE FOR THE NEGATIVE OUTLOOK
Metrics are comfortable for the rating category so the negative outlook
instead reflects the business concentration in Italy and mirrors the negative
outlook on Italy. If the sovereign was downgraded we do not see
Esselunga as being absolutely constrained by Italy's rating and
might consider positioning the rating above the sovereign if justified
by an expectation of sufficiently strong and resilient performance.
However in view of the domestic concentration we would not expect the
rating to be positioned more than one notch above Italy, even if
performance and metrics are very strong.
WHAT COULD CHANGE THE RATING UP/DOWN
An upgrade to Baa1 is now considered unlikely at this point. However,
upward rating pressure would reflect a combination of: (1) continued
improvement in the company's financial profile, resulting in adjusted
(gross) debt/EBITDA to trend below 2x and retained cash flow ("RCF")/net
debt above 30% on a sustained basis; (2) simplification of
the financial structure in particular with regard to the existence of
debt at Supermarkets level. Any potential upgrade would also be
considered in the context of the prevailing macroeconomic conditions and
the Government of Italy's rating.
Conversely, negative pressure on the rating could materialize if
(1) Esselunga's credit metrics deteriorated with adjusted (gross)
debt/EBITDA trending above 2.5x and retained cash flow/net debt
below 20% on a sustained basis. Any potential downgrade
to the Government of Italy's rating could also exert negative pressure
on Esselunga's rating.
The principal methodology used in these ratings was Retail Industry published
in October 2015. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
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 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.
Ernesto Bisagno
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Marina Albo
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
No Related Data.
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