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Rating Action:

Moody's downgrades Atalian's CFR to Caa1; negative outlook

17 Apr 2020

Paris, April 17, 2020 -- Moody's Investors Service ("Moody's") has today downgraded the ratings of La Financiere ATALIAN S.A.S. ("Atalian" or the "company"), a leading provider of cleaning and facility management services based in France, including the corporate family rating (CFR) to Caa1 from B3, the probability of default rating (PDR) to Caa1-PD from B3-PD, the ratings on the senior notes to Caa2 from Caa1. The outlook remains negative.

"The downgrade of Atalian's ratings mainly reflects the sustained negative free cash flow in 2019, and a limited liquidity buffer in our view to cushion the impact of confinement measures across its largest markets", says Eric Kang, a Moody's Vice President-Senior Analyst and lead analyst on Atalian. "The outlook remains negative because the company's liquidity could be further pressured if confinement measures extend beyond the second quarter of 2020, or if it is not successful in securing new credit lines to support liquidity. More positively, we expect the company to benefit from additional level of activity following the end of the lockdown period although it is difficult to forecast to which extent at this stage.", adds Mr Kang.

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

The coronavirus outbreak is taking place at a time when the company's turnaround plan started to show the first signs of improvements following the weak performance in 2018. In particular the company began to show improvements in terms of (1) its internal organization and processes and (2) a stronger than expected recovery in revenue and EBITDA in France, which is the company's largest market at c.44% of total revenue in 2019 followed by the UK at c.26% of total revenue.

However, the improvement in credit metrics, particularly Moody's-adjusted debt/EBITDA and free cash flow, have been slower than Moody's initial expectations, reflecting the working capital increase associated with higher than anticipated revenue growth. Moody's-adjusted free cash flow (after neutralization of the change in deconsolidated factoring) remained negative at €59 million in 2019 compared to €128 million in 2018 while Moody's-adjusted debt/EBITDA (including restructuring costs, provisions, and deconsolidated factoring) increased to 8.8x at year-end 2019 from 8.5x at year-end 2018 (pro forma the acquisition of Servest) because of the increase in deconsolidated factoring debt to offset the negative free cash flow.

Moody's views the liquidity buffer to cushion the impact of confinement measures as limited, although Moody's notes the improvement in cash flow generation in the second half of 2019 under the new management team compared to the deterioration observed in the second half of 2018. Moody's expects liquidity to weaken materially in the coming months because the temporary drop in revenue due to confinement measures will likely result in negative free cash flow, even after factoring the benefits of governmental measures such as partial employment benefits and deferral of social charges. An extension of confinement measures beyond the second quarter of 2020 could also require access to additional credit lines to maintain an adequate level of liquidity. Moody's currently assumes that the company will successfully obtain new facilities guaranteed by France's State Investment Bank given its large workforce of around 32,000 full time equivalent employees in France in 2019, although there is still limited visibility at this stage on the final quantum.

At year-end 2019, the company had cash balances of €87 million and €49 million available under its €103 million revolving credit facility (RCF) maturing in April 2023. The company also has €49 million available under its factoring facilities of c.€218 million in aggregate, including a GBP27 million facility in the UK which expires in December 2020. The other factoring facility expires in September 2021. The senior notes mature in May 2024 and May 2025. Moody's also expects the company to maintain ample headroom under the net senior secured leverage attached to the RCF and set at 1.75x.

More positively, Moody's expects the company to benefit from additional level of activity following the end of the lockdown period due to the likely need for more thorough cleaning services and hygienic conditions, although it is difficult to forecast to which extent at this stage. Nonetheless, the company should be in a good position to capture a good share of this additional demand given its scale and operational track record in this regard.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the risk that the company's liquidity could be further pressured if confinement measures extend beyond the second quarter of 2020, or if it is not successful in securing new credit lines to support liquidity.

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

Downward rating pressure could arise if Atalian fails to secure additional credit facilities to support its liquidity or if confinement measures remains in place for an extended period of time, resulting in a further deterioration of the company's liquidity or an unsustainable capital structure.

Upward rating pressure could develop over time following the end of confinement measures if (1) Moody's-adjusted debt/EBITDA reduces sustainably to below 7.0x, (2) Moody's EBITA/interest is sustainably well above 1.0x, and (3) the company maintains a solid liquidity profile including positive Moody's free cash flow.

STRUCTURAL CONSIDERATIONS

The senior notes due 2024 and 2025 rank pari passu. The notes are unsecured and guaranteed on a senior basis by Atalian S.A.S.U., Atalian Europe S.A., and Atalian Global Services UK 2 Limited, although obligations of certain guarantors are contractually limited because these subsidiaries of La Financiere Atalian S.A.S. are holding companies that do not generate any significant revenues. The RCF benefits from guarantees from the same entities and Atalian Cleaning S.A.S. which also guarantees the senior notes due 2024 but with limitations.

The notes are rated Caa2, one notch below the CFR, reflecting their structural subordination to non-debt liabilities at the operating subsidiaries, including trade payables. Additionally, the RCF has priority claim over the notes over certain intermediary holding companies of Atalian, namely Atalian Cleaning S.A.S., Atalian Proprete S.A.S., Atalian Europe S.A., Atalian Global Services UK 2 Limited, and Servest Limited, thanks to the pledge over the share of these entities.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in France, Atalian is a leading provider of cleaning and facility management services. The company operates throughout 32 countries and had revenues of c.€3.1 billion in 2019.

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.

Eric Kang, CFA
VP-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

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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