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Rating Action:

Moody's changes outlook on Casino's Ba1 rating to negative; affirms ratings

28 Sep 2018

London, 28 September 2018 -- Moody's Investors Service ("Moody's") has today changed to negative from stable the outlook on the Ba1 corporate family rating (CFR) of French food retailer Casino Guichard-Perrachon SA (Casino). At the same time, Moody's has affirmed Casino's CFR as well as its Ba1-PD probability of default rating, its Ba1 senior unsecured long-term ratings, the Ba3 rating assigned to its deeply subordinated perpetual bonds and its Not Prime short-term rating.

"Our decision reflects the high leverage of Casino's parent company Rallye, whose debt exceeds the value of its assets, as well as the underlying low cash flow generation of French stores and limited cash circulation between Casino France and emerging market subsidiaries," says Vincent Gusdorf, a Moody's Vice President - Senior Analyst and lead analyst for Casino. "Casino has also been slower to deliver on its disposal of Brazilian subsidiary Via Varejo than we had anticipated when assigning the initial rating, and its leverage remains outside our guidance for the Ba1 category for the moment."

RATINGS RATIONALE

The negative outlook reflects Moody's view that Rallye's leverage has increased and Casino has been slower to deliver on its disposal of Via Varejo than the rating agency had anticipated, with the company's leverage remaining for the moment higher than the guidance for the Ba1 rating. Despite the recent recovery of Casino's share price, Moody's estimates that the value of Rallye's assets stood at around EUR2.2 billion on 26 September 2018, compared with a net debt of EUR2.9 billion. This translates into a loan-to-value (LTV) ratio of about 130%, an unsustainably high level, although these calculations do not include any potential control premium related to Rallye's majority ownership in Casino. Rallye has recently bolstered its liquidity by negotiating a new EUR500 million credit facility maturing in 2020, but it does not generate significant cash flows and must therefore refinance its debt at low interest rates.

The increase in Rallye's loan-to-value ratio creates meaningful uncertainties for Casino as the parent could attempt to extract value from its subsidiary if its leverage does not decline or if liquidity stress crystallises. However, Casino's debt instruments have no cross-default clause with those of Rallye's, and Casino's listing and substantial minorities limit Rallye's options. Moody's current rating rationale is predicated on Casino's separate listed status, the substantial minority interests and regulation providing a resilient and effective barrier against credit stress being transmitted from Rallye to Casino. Any change to that view which left Casino creditors more closely exposed to Rallye's current unsustainably weak financial structure would likely result in a multi-notch downgrade for Casino's ratings..

Low cash flow in France also constrains Casino's credit quality. Excluding gains from interest swaps and recurring asset disposals and assuming a normalised working capital inflow of EUR150 million, Moody's calculates a free cash flow after dividends of negative EUR362 million for the 12 months ended 30 June 2018, based on reported numbers. However, Casino France's actual free cash flow generation as calculated by Moody's stood at positive EUR175 million because it benefited from a EUR597 million working capital inflow and EUR90 million of cash from the unwinding of interest swaps.

Moreover, minorities limit cash circulation within the group. To upstream cash from its Brazilian subsidiary Grupo Pão de Açúcar (GPA), which has paid almost no dividends in 2016 and 2017, Segisor, another subsidiary, took a EUR400 million loan during the first half of 2018 to pay a EUR200 million dividend to Casino France and another EUR200 million dividend to Exito, Casino's Colombian subsidiary. Consolidated net debt did not rise, but this transaction illustrates the difficulty to upstream cash from emerging market subsidiaries to Casino France.

Although French stores' earnings will improve, Moody's-adjusted EBITDA should stabilise at about EUR2.6 billion in the next 18 months because of the depreciation of Latin American currencies. The Ba1 rating factors in Moody's view that Casino will divest Via Varejo in 2018, in line with our previous assumptions. The agency also anticipates that Casino will sell at least EUR1.5 billion of assets in France by June 2019, with the proceeds going towards debt repayment. However, further negative pressure on the rating would materialise in the event that the company deviates from the planned disposal schedule.

Casino has an adequate liquidity profile, with EUR3.4 billion of cash on its balance sheet, of which EUR2.1 billion in France, compared to EUR2.2 billion of short-term debt. French stores also have access to EUR3.3 billion of committed undrawn credit facilities as of 30 June 2018.

STRUCTURAL CONSIDERATIONS

Casino's debt is mostly located at the level of Casino France (EUR6.0 billion as of 31 December 2017), GPA (EUR1.1 billion) and Exito (EUR1.2 billion). There are no cross-default clauses or guarantees between these subsidiaries. Moody's considers all the debt instruments to be unsecured and to rank pari passu within each subsidiary, with the exception of deeply subordinated perpetual bonds issued by Casino France, which amounted to EUR1.35 billion as of 30 June 2018.

The probability of default rating is based on a 50% family recovery assumption, which reflects a capital structure including bonds and bank debts with loose financial covenants.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects Moody's view that Rallye's high loan-to-value ratio creates substantial uncertainties for Casino, despite some protections stemming from Casino's listing and minorities. The outlook also reflects the fact that Casino's high leverage remains outside the guidance for the Ba1 rating for the moment, so the company will likely need to execute meaningful and timely disposals and allocate proceeds to debt repayment to reduce its leverage to maintain the current rating. Moody's notes Casino's depressed share price, but understands that it retains adequate market access at present; any weakening of its market access, possibly due to contagion from the leverage stress at Rallye, could also be a driver for a negative action.

WHAT COULD CHANGE THE RATING UP/DOWN

Further negative pressure on the ratings could materialise if Rallye's credit quality does not improve, as shown for instance by a consistently high loan-to-value ratio or an inability to refinance upcoming debt maturities. Downward pressure on the ratings would also arise if Casino deviates from the planned schedule to dispose of Via Varejo and its French assets.

Quantitatively, Moody's could downgrade the ratings if Casino's Moody's-adjusted debt/EBITDA does not fall towards at least the middle of the 5x-5.5x range. A more aggressive financial policy, with for instance unexpected acquisitions or an increase in shareholder remuneration, or any other steps which result in Casino's creditors becoming more exposed to Rallye's current unsustainably weak financial structure, would also lead to a negative rating action.

Although an upgrade is currently unlikely, Moody's could raise Casino's ratings if it lowered its Moody's-adjusted debt/EBITDA to the middle of the 4x-4.5x range for a prolonged period of time and if the credit quality of Casino's holdings improved significantly, with notably a meaningful reduction in Rallye's loan-to-value ratio. An upgrade would also require that minorities do not increase within the group's subsidiaries and that its financial policy remains prudent and transparent.

COMPANY PROFILE

With EUR37 billion of reported revenue in the 12 months to 30 June 2018, France-based Casino is one of the largest food retailers in Europe and the fourth-largest grocer in France. Its main shareholder is the French holding Groupe Rallye, which owned 51.4% of Casino's capital and 64.3% of its voting rights as of 30 June 2018. Casino's Chief Executive Officer (CEO) Jean-Charles Naouri controls Groupe Rallye through a cascade of holdings.

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.

Affirmations:

..Issuer: Casino Guichard-Perrachon SA

.... Probability of Default Rating, Affirmed Ba1-PD

.... LT Corporate Family Rating, Affirmed Ba1

....Subordinate, Affirmed Ba3

....Commercial Paper, Affirmed NP

....Other Short-Term, Affirmed (P)NP

....Senior Unsecured MTN program, Affirmed (P)Ba1

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1

Outlook Actions:

..Issuer: Casino Guichard-Perrachon SA

....Outlook, Changed To Negative From Stable

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.

Vincent Gusdorf
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

Yasmina Serghini
Associate Managing Director
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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