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I AGREE
Rating Action:

Moody's changes Hema's outlook to negative from stable

29 May 2019

Paris, May 29, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the B3 corporate family rating (CFR) and B3-PD probability of default rating (PDR)Hema B.V.(Hema or the company)). Concurrently Moody's has affirmed the B2 instrument rating of the EUR600 million senior secured floating rate notes due 2022 issued by HEMA Bondco I B.V. and the Caa2 rating to the EUR 150 million senior unsecured notes due 2023 issued by HEMA Bondco II B.V.. Moody's has changed the outlook of Hema, HEMA Bondco I B.V. and HEMA Bondco II B.V. to negative from stable.

"Today's change in outlook to negative reflects Hema's deteriorating operational performance and negative free cash flow generation in FY 2018 and our expectation of continued challenging trading conditions in the next 12 to 18 months owing to intense competition, slow economic growth and high cost inflation which will keep pressure on Hema's earnings and cash flows in the coming quarters" says Francesco Bozzano a Moody's Assistant Vice President --Analyst and lead analyst for Hema.

RATINGS RATIONALE

Hema's B3 corporate family rating (CFR) reflects (1) the company's highly leveraged capital structure, with Moody's-adjusted debt/EBITDA ratio at 7.3x as of 3 February 2019 (fiscal year, FY 2018), and limited deleveraging prospects over the next 18 months; (2) challenging trading conditions in the European apparel and non-food retail market currently, owing to deteriorating consumer sentiment and intense competitive environment; (3) the company's high sales concentration in the Netherlands and its exposure to macroeconomic trends; and (4) execution risks associated with its expansion plan.

Conversely, the CFR is supported by the company's (1) established market position and brand awareness in the Netherlands; (2) growth prospects, supported by store remodeling in the Netherlands, international store expansion and online growth; and (3) differentiated and diversified product offering compared with other retailers with an emphasis on household goods, apparel and food.

The B3 CFR also incorporates Moody's expectation that Hema will successfully repay or convert to equity the outstanding pay-in-kind (PIK) toggle notes of EUR40 million plus capitalized interest at AMEH XXVI B.V. , its parent company, well ahead of its maturity in June 2020.

Moody's expects leverage to remain around 7.0x in the next 12 months because of continued challenging trading conditions which will constrain earnings and margin recovery. In particular, Moody's expects like for like (LFL) growth to remain broadly flat in 2019 and cost savings initiatives to be offset by rising cost inflation. Moody's expects that Hema and Ramphastos Investments (Ramphastos), Hema's owner, will take steps rapidly to repay the outstanding PIK instrument at AMEH XXVI B.V. which is due in 2020. Moody's also expects some EBITDA growth from the ongoing cost saving initiatives. This would however only partially reduce leverage which will remain well above 6.0x in 2020. Moody's includes the around EUR40 million of outstanding PIK in the calculation of the company's adjusted debt due to a cross-default provision which could trigger a default on the debt of Hema's restricted group. Moody's also includes capitalized operating lease commitments of around EUR800 million in its calculation of the company's adjusted debt.

In November 2018, Ramphastos has made a EUR35.8 million capital contribution to the company and converted to equity around EUR80 million worth of PIK notes at AMEH XXVI B.V.. These recent shareholder contributions are credit positive and partially offset Hema's deteriorating operational performance in 2018. Moody's expects Ramphastos to have the financial means and willingness to repay or convert to equity the EUR40 million outstanding PIK plus capitalised interest well ahead of its maturity.

The company's liquidity has weakened in 2018 because of the decline in operating performance and negative free cash flow generation, which was materially affected by a EUR65 million one-off negative working capital movement. With a cash balance of EUR29 million in FY 2018 and ongoing negative free cash flow, the company's liquidity profile is viewed as stretched and Moody's anticipates that the company will be increasingly reliant on its EUR68 million available credit facilities. The company currently has access to a EUR80 million super-senior Revolving Credit Facility, of which EUR58 million was available as of FY2018 and to a EUR10 million undrawn bank credit facility.

With expected cash flow from operations of around EUR96 million and approximately EUR50 million capex in FY2019, Moody's expects free cash flow to improve from its FY2018 level but to remain negative. During FY2019 Moody's expects the company to continue to rely on its credit facilities to finance its intra-year working capital fluctuations, estimated at about EUR40 million.

The RCF, which expires in 2022, is subject to a minimum EBITDA covenant of EUR70 million which compares to a company adjusted EBITDA of EUR 111.7 million in FY2018, activated if drawings exceed 25%. There are no significant term debt maturities until 2022 when the senior secured notes mature.

STRUCTURAL CONSIDERATIONS

The B3-PD PDR, in line with the CFR, reflects Moody's assumption of a 50% Loss Given Default, typical for essentially all-bond-secured capital structures with a single springing covenant under the RCF with significant capacity. The EUR 600 million senior secured notes are rated B2, one notch above the CFR, reflecting their more senior ranking in the waterfall and the buffer provided by the EUR150 million senior unsecured notes. The Caa2 rating on the EUR 150 million senior unsecured notes reflects their subordinated position in the capital structure, with the EUR600 million senior secured notes and EUR80 million RCF contractually ranking senior to them.

Rating Outlook

The negative outlook reflects Moody's expectations that Hema's sales and earnings will remain under pressure in the next 12 to 18 months.

The outlook could be stabilized if there is evidence of a sustainable recovery in earnings and improvement in the company's free cash flow and liquidity, which are currently weak.

What Could Change the Rating Up/Down

The company is weakly positioned in the B3 rating category and as such, an upgrade is unlikely in the short term. However, positive pressure on the ratings could result from a sustained improvement in operating performance resulting in solid top line growth and improving margins, significantly positive free cash flow, and leverage at or below 5.5x on a sustained basis.

Downward pressure on the ratings could arise should Hema's operating performance weaken further, if the company does not deleverage from its current levels or if its EBIT/interest coverage moves below 1.0x (on a Moody's adjusted basis). Negative ratings pressure would also arise should the company's free cash flow generation fail to improve leading to a further weakening in the company's liquidity profile from current levels.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail Industry published in May 2018. 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 762 stores as of the beginning of February 2019, principally in Benelux (645), France (75), Germany (19), Spain (nine) and the UK (10). In 2018, Hema generated net sales of EUR1,269.9 million and adjusted EBITDA of EUR111.7 million.

On November 29, 2018, Ramphastos Investments, a Dutch private equity company, acquired Hema from Lion Capital.

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.

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

Yasmina Serghini, CFA
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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