Paris, June 16, 2020 -- Moody's Investors Service ('Moody's') today confirmed Hornbach Baumarkt
AG's ("Hornbach" or the "company") Ba3 long-term corporate family
rating (CFR) and its Ba3-PD probability of default rating (PDR).
Concurrently, Hornbach's Ba2 EUR250 million worth of guaranteed
senior unsecured notes due 2026 (the "Bond") have also been confirmed.
The outlook has been changed to stable from ratings under review.
This concludes the review for downgrade that was initiated on April 2,
2020.
RATINGS RATIONALE
The rating confirmation reflects the solid performance of the company
in the fiscal year ended February 2020 (fiscal 2019) and in the first
quarter of fiscal 2020. This is despite closures of around one
third of the company's stores due to the coronavirus outbreak in
parts of Germany and in other countries where Hornbach operates.
The stable outlook reflects Moody's expectation that Hornbach's
earnings will remain resilient relative to other non-food retailers,
that leverage will remain below 5.0x and that the company will
maintain good liquidity 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. Contrary to other non-food retailers,
the do-it-yourself (DIY) segment has benefited from the
coronavirus outbreak as confinement measures have led people to spend
more time at home and this has therefore boosted demand for DIY home improvement
projects.
After a temporary closure of around one third of its stores starting from
March 14th, 2020, since May 6th all Hornbach's stores
have reopened. During its store closures, Hornbach was also
able to partially offset the lack of store revenues thanks to the increase
of its online sales. As a result of the strong demand for DIY products
and Hornbach's ability to trade in stores and online, the
company's revenues grew 18.4% to EUR 1,492 million
in Q1 of fiscal 2020 [1]. However, Moody's expects
Hornbach's revenues for fiscal 2020 to remain slightly below fiscal
2019 reflecting the expected deterioration in macroeconomic conditions
in Germany and across Europe.
Hornbach's rating continues to reflect (1) its strong position in
its domestic market and good geographical diversification across Europe;
(2) positive underlying growth, as reflected by its ability to outperform
the market; and (3) a good liquidity profile, which is underpinned
by the company's commitment to maintaining a conservative financial
policy.
Hornbach's Ba3 CFR is constrained by: (1) high gross adjusted
debt, which we expect to remain above 4.5x in the next 12
to 18 months; (2) low margins due to intense competition in the DIY
industry in Germany and the high level of digitalisation costs; (3)
Hornbach's relatively small size compared with other European retailers;
and (4) the high level of capital spending associated with new store openings,
which leads to negative free cash flow (FCF) generation.
STRUCTURAL CONSIDERATIONS
The Bond's Ba2 rating is one notch above the company's CFR because it
benefits from senior guarantees from Hornbach's operating subsidiaries.
These operating subsidiaries account for almost all of the company's tangible
net assets and EBITDA. The €295 million promissory notes issued
in fiscal 2018 are not guaranteed by Hornbach's operating subsidiaries
and are therefore subordinated to the Bond.
The Ba3-PD probability of default rating, in line with the
CFR, reflects Moody's assumption of a 50% family recovery
rate, typical for bond structures with a limited set of financial
covenants. Some of the facilities contain financial covenants (interest
coverage of at least 2.25x and equity ratio of at least 25%),
which the company has been able to meet comfortably to date. Moody's
expects the company will maintain satisfactory headroom when the financial
covenants are tested in the next 12 months.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook is predicated on the expectation of a good performance
in the next 12-18 months driven by the strong demand for DIY products
despite the coronavirus disruption and the slow down in the economy across
Europe. The stable outlook also reflects Moody's expectation that
Hornbach will maintain good liquidity and will maintain a prudent financial
policy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the ratings in the medium term could be exerted as
a result of Hornbach's financial leverage decreasing sustainably below
4.5x. A higher rating would also require the company to
maintain its Moody's adjusted EBIT margin above 4% on a sustained
basis and the generation of positive free cash flow.
Conversely, downward pressure could be exerted on the if there is
deterioration in the company's profitability, such that Moody's
adjusted (gross) debt/EBITDA goes above 5.0x, interest cover
decreases below 2.0x and if free cash flow is negative for a prolonged
period. The rating could also be downgrade if the company fails
to maintain a good liquidity.
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
Hornbach is a mid-sized home improvement retailer mainly operating
in Germany, with 96 stores as of the end of fiscal 2019, and
other European countries, including Austria (14), the Netherlands
(15), the Czech Republic (10), Switzerland (7), Romania
(6) Sweden (7), Slovakia (4) and Luxembourg (1). The company
reported sales of EUR4.4 billion as of the end of fiscal 2019.
Hornbach's shares are listed on the Frankfurt Stock Exchange. Hornbach's
parent company, Hornbach Holding AG & Co. KGaA,
owns 76.4% of Hornbach's share capital, while independent
investors own 23.6%. In turn, the Hornbach
family owns 37.5% of Hornbach Holding's total share capital,
and the remaining 62.5% are free float.
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
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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.
REFERENCES/CITATIONS
[1] Company's announcement 09-Jun-2020
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
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JOURNALISTS: 44 20 7772 5456
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