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Rating Action:

Moody's changes outlook on Metro AG's Baa3 ratings to developing; affirms ratings

01 Apr 2016

London, 01 April 2016 -- Moody's Investors Service (Moody's) has today changed to developing from stable the outlook on the Baa3/(P)Baa3 long-term issuer and senior unsecured ratings and Prime-3 (P-3/(P)P-3) short-term ratings of one of the world's largest retailers, Metro AG (Metro), and its guaranteed subsidiary Metro Finance B.V. At the same time, Moody's has affirmed Metro's ratings.

"Our decision to change the outlook to developing from stable reflects Metro's recent announcement that it is preparing to create two independent companies through a demerger of the group, which could positively or negatively affect the ratings depending on the capital structure post-demerger," says Sven Reinke, a Moody's Vice President -- Senior Credit Office and lead analyst for Metro.

RATINGS RATIONALE

Today's outlook change to developing primarily reflects Moody's view that Metro's 30 March 2016 announcement that it is preparing to split into two independent retail companies could impact the company's ratings.

A successful completion of the intended demerger would change the company's business profile and could also have an impact on its financial profile depending on the capital structure that would be put in place at the outset of the demerger. Depending on the capital structure, as well as decisions regarding financial policy, the company's credit profile could improve or deteriorate, which could lead to an upgrade or downgrade of the ratings.

The demerger will create two independent retail groups: a Wholesale and Food Specialist group (comprising the Cash & Carry segment and Real); and a Consumer Electronics products and services group (comprising Media-Saturn). Both groups would have market-leading positions in their respective markets and would be separately listed with Metro shareholders receiving shares in both entities.

Metro stated that a demerger is the logical next step in the transformation of the Metro Group towards more customer centricity, stronger focus and greater entrepreneurship. Both companies would benefit from an accelerated growth and strategy implementation, simplified structures and an improved time-to-market. In addition, two separate listings would also provide greater optionality for each company to pursue partnerships and M&A transactions.

Moody's positively acknowledges the strategic rational of a demerger, particularly in the light of the very limited synergies between the two businesses. The transaction would not only increase the operational flexibility of both companies but could also enlarge the financial flexibility that two separate listings would provide.

However, the demerger also has the potential to be negative for the company's credit profile as it will not only create two smaller companies -- that are still geographically well diversified and benefit from market-leading positions in their respective markets -- but also two less-diversified entities in terms of their product offering. In this regard, Moody's notes that the different segments of the Metro Group currently provide credit enhancing diversification as they follow different economic cycles.

A key consideration for the ratings of the two separate companies will be the capital structure that will be put in place including the allocation of the existing bonds and other financial liabilities, the exposure to operating leases and the financial policy in terms of appetite for debt-financed acquisitions and shareholder remuneration. Moody's notes that Metro has not yet made such decisions and that it has some flexibility to support the financial profile of both companies at the outset for example with potentially monetising parts of the group's real estate assets.

Metro reported improving sales and largely stable EBIT margins adjusted for the negative FX translation impact in fiscal 2015 and in Q1 fiscal 2016 driven by like-for-like sales growth at the Cash & Carry and Media-Saturn divisions. However, Metro's EBIT generation was impacted by a negative EUR117 million FX translations effect in fiscal 2015 and EUR40 million in Q1 fiscal 2016, in particular due to the weakening of the Russian rouble.

Metro's Baa3 rating reflects its strong business profile as one of the largest retailers in the world, underpinned by its geographic and business diversity, with operations in 35 countries as of September 2015. In the financial year 2015, sales generated outside Germany accounted for around 62% of the group's total turnover. The ratings also factor in the company's high seasonality and relatively weak financial metrics for the current rating category.

WHAT COULD CHANGE THE RATING UP/DOWN

Although upward pressure on the rating is unlikely at this time, this could occur if Metro's gross leverage were to trend towards 4.0x, with retained cash flow/net debt moving above 16% on a sustainable basis while sustainably maintaining a satisfactory liquidity profile.

Conversely, negative rating pressure would likely occur if Metro's gross leverage were to exceed 4.8x and retained cash flow/net debt fall below 12.5% on a continued basis as of September year end. Any deterioration in the company's liquidity profile would also likely result in negative pressure being exerted on the rating or outlook.

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Metro AG, based in Dusseldorf, Germany, is one of the world's largest retailers, and is focused on three major formats: Cash & Carry wholesale (Metro and Makro brands), food retailing through the Real format, and consumer electronics (Media Markt and Saturn). In the financial year 2015, the company reported revenues and EBIT (before special items) of EUR59.2 billion and EUR1,511 million, 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 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.

This rating was not initiated or not maintained at the request of the rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis, the rated entity or its agent(s) is considered to be a non-participating entity. The rated entity or its agent(s) generally does not provide Moody's with information for the purposes of its ratings process.

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.

Sven Reinke
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
SUBSCRIBERS: 44 20 7772 5454

Marina Albo
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 changes outlook on Metro AG's Baa3 ratings to developing; affirms ratings
No Related Data.
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