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Rating Action:

Moody's confirms El Corte Ingles Ba1 CFR; outlook changed to negative

29 Jun 2020

Paris, June 29, 2020 -- Moody's Investors Service ('Moody's') today confirmed El Corte Ingles, S.A.'s ("ECI" or the "company") Ba1 long-term corporate family rating (CFR) and its Ba1-PD probability of default rating (PDR). Concurrently, ECI's EUR690 million senior bond Ba1 rating has also been confirmed. The outlook has been changed to negative from ratings under review.

This concludes the review for downgrade that was initiated on April 3, 2020

RATINGS RATIONALE

The rating confirmation reflects (1) the company's strong performance of its food and online business during the store lockdown during the coronavirus outbreak in Spain between March and May 2020; (2) the company's deleveraging actions pre-crisis, which reduced Moody's Adjusted debt/EBITDA to 3.1x as of February 2020 (fiscal 2019); (3) the improvement in the company's liquidity compared to March 2020 thanks to its new credit facilities and the company's measures to reduce the cash burn during the lockdown period; and (4) Moody's expectation that ECI's leverage will trend to 4.0x in the next 12 to 18 months.

The coronavirus outbreak is considered a social risk under Moody's Environmental, Social and Governance (ESG) framework given the substantial implications for public health and safety, deteriorating global economic outlook, falling oil prices, and asset price declines, which are creating a severe and extensive credit shock across many sectors, regions and markets. Despite closures of all its stores (excluding its grocery section) from 14th March 2020, ECI was able to generate sales in the first quarter of fiscal 2020 from its online and its grocery divisions.

Since 8 June 2020 ECI has reopened all its stores and we expect the company's sales to gradually recover during the rest of fiscal 2020. However, Moody's expects ECI's total revenues for fiscal 2020 to be approximately EUR 4.4 billion, or one third, less compared to fiscal 2019 reflecting the lockdown and the expected deterioration in macroeconomic conditions in Spain (of which around EUR 2 billion from sales reduction in the low margin travel agency business). ECI's revenue shortfall is mitigated by the company's actions to cut its operating costs including temporary unemployment measures undertaken during the lockdown. Moody's expects ECI sales and earnings to continue their recovery in fiscal 2021 reaching a Moody's adjusted leverage of around 4.0x driven by a gradual return to department stores of Spanish shoppers and a recovery in macroeconomic conditions in Spain. The negative outlook reflects the high uncertainty around the company's ability to recover in the next 12 to 18 months which is dependent on a strong and steady recovery of Spanish consumers' demand and on a continuing reduction in coronavirus contagion in Spain.

ECI´s Ba1 CFR remains underpinned by (1) the company´s leading market positions in most of the business segments in which it operates, (2) strong brand awareness and high interest from third-party brands to operate in ECI's stores, (3) a large and unencumbered real estate portfolio with a proven track record of successful asset monetization, (4) and good deleveraging prospects and the firm commitment to maintain a more conservative financial policy than in the past.

The rating also reflects (1) the company´s high geographic concentration in its home market, (2) the cyclical, seasonal and discretionary nature of its business model, (3) lower profitability margins than rated peers and high earnings dependency on its top ten best-performing stores, (4) weak historic corporate governance (5) and the risks and challenges posed by increasing online penetration rates and competition from pure e-commerce specialists.

Moody's considers the company's liquidity as adequate and sufficient to cover working capital seasonality. As of the end of May 2020, the company had a total liquidity of around EUR1.5 billion, comprising cash on the balance sheet of around EUR130 million, and EUR1.34 billion available under its new one year revolving credit facility (new RCF) maturing in 2021. The new RCF was secured by the company on 1 April 2020. The existing EUR1.1 billion RCF (existing RCF) maturing in 2024 is fully drawn as of May 2020. Moody's expects the company to refinance or extend the new RCF maturity well in advance of its maturity. The company has a maintenance covenant on its EUR1.1 billion existing RCF, which will start being calculated only from the end of fiscal 2021, and if the company doesn't have at least two investment grade ratings.

STRUCTURAL CONSIDERATIONS

The Ba1 instrument rating on the senior unsecured notes is in line with the CFR. The company's probability of default rating of Ba1-PD is also in line with the CFR. The probability of default rating reflects the use of a 50% family recovery rate resulting from a capital structure comprising senior unsecured bonds and unsecured bank debt.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the high uncertainty around the sales and earnings recovery of the company and the uncertainty around the company's ability to reduce leverage to 4.0x in the next 12 to 18 months.

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

Positive rating pressure is not expected in the short term. However, it could arise if the company maintains a good liquidity buffer supported by improving profitability above 8%, on a Moody's Adjusted EBITDA margin, and a solid free cash flow generation and if its Moody´s adjusted (gross) debt/EBITDA ratio decreases sustainably below 3.5x .

Downward pressure on the ratings could arise as a result of a deterioration in the company's liquidity. Downward pressure could also arise if there is a prolonged period of negative like-for-like sales, weaker profitability and depressed free cash flow generation. On a quantitative basis, the ratings could be downgraded if Moody´s adjusted (gross) debt/EBITDA ratio increases and is maintained above 4.0x.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

ECI, headquartered in Madrid, Spain, is the largest department store in Europe, with groupwide net sales of almost EUR16 billion and adjusted EBITDA of EUR1.2 billion in fiscal 2019. The company operates under two divisions, retail and non-retail, which represented around 82% and 18% for both sales and EBITDA, respectively, in fiscal 2019.

Founded in 1935 by Ramon Areces, ECI remains privately owned and controlled by the founder's descendants. Its current main shareholders are the Ramon Areces Foundation, Cartera de Valores IASA and PrimeFin, S.A.

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

These ratings are 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_1133569.

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

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

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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