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Rating Action:

Moody's downgrades BrightHouse's ratings to B3; outlook negative

25 Nov 2016

London, 25 November 2016 -- Moody's Investors Service, ("Moody's") has today downgraded the ratings of BrightHouse Group PLC's ('BrightHouse'), the UK's leading rent-to-own market operator. Moody's has downgraded Brighthouse's corporate family rating (CFR) to B3 from B2 and the rating on its GBP220 million senior secured notes to B3 from B2. The outlook on all ratings is negative.

Today's rating action primarily reflects the following drivers:

- Further weakening of the company's credit metrics driven by regulatory changes and adverse product mix

- Upcoming refinancing risk on its senior secured notes maturing in May 2018

Concurrently, Moody's has downgraded BrightHouse's probability of default (PDR) to B3-PD from B1-PD.

RATINGS RATIONALE

The downgrade reflects the rapid deterioration in the company's metrics in the second quarter due to the impact of new procedures introduced by the Financial Conduct Authority (FCA) in February 2016 as part of its ongoing authorization across the industry.

While the company introduces measures to adapt to new processes, there is an uncertainty surrounding the success of these methods in stemming customer loss. Furthermore, Moody's doesn't exclude a possibility of further negative FCA ruling for the industry. This, combined with the prospect of refinancing the notes due in May 2018, leads to a negative outlook.

The company's topline declined by 12% quarter-on-quarter during the quarter ended 1 October 2016 whereas LTM September 2016 EBITDA (defined by management) declined to GBP41 million from GPB56 million in financial year ended March 2016 (FY16). Furthermore, total number of customers declined year-on-year by 10% to approximately 251 thousand at the end of September 2016 and contract portfolio declined year-on-year by 22% (defined as an aggregate amount of remaining payments due under hire purchase agreements on a given date, if they run to full term).

The changes so far introduced by the FCA are a stricter affordability processes and tightened credit criteria in the rent-to-own industry leading to a decline in new customer acceptance, reduction in contract portfolio and higher compliance and staff training costs. The performance was also impacted by the company's decision to temporarily suspend the charging of late fees, ongoing shift in sales mix towards more short-term, technology products and high price deflation on furniture and electrical products. The company's strategy is to improve portfolio additions via automation, improvement in online proposition as well as payments and call centre processes. Full online capabilities are expected to be delivered by June 2017.

The B3 CFR reflects (i) the negative impact on the industry and BrightHouse from the recent FCA's authorisation process and increased regulatory scrutiny overall, including the contraction of BrightHouse's contract portfolio; (ii) the company's small scale in the context of the broader retail market and competition from low cost and online retailers; and (iii) credit risk given the company's customer base of low-income households with poor credit history, although so far well managed.

The rating also reflects (i) BrightHouse's well-established leading position in the UK rent-to-own market supported by over 300 branches over the UK; (ii) fairly unique product offering, notably product rentals over two-three years with the right to purchase at the end of the contract, targeting limited disposal income customer base and differentiating it from most mainstream retailers; (iii) resilience of its positive cash flow generation.

Moody's adjusted gross debt / EBITDA rose to 5.6x as of September 2016 from 4.2x as of the end of March 2016 and EBIT/interest expense (Moody's adjusted) declined to 1.1x from 1.8x respectively. Moody's expects the company's metrics to stay under pressure during the next two quarters, bringing gross debt/EBITDA above 7.0x by the end of FY17. Thereafter, Moody's expects some improvement as the company adjusts to new regulatory environment. Given expected high leverage and uncertain growth prospects for BrightHouse and the industry overall, the company may find it challenging to refinance its notes before their maturity in May 2018 and is likely to incur higher cost on its debt than the current notes carry.

Moody's expects the liquidity to remain adequate, despite the fact that the company cancelled its GBP25 million revolving credit facility (RCF) maturing in 2017. As of end of September 2016, the company reported cash on balance sheet of GBP75million (including GBP9 million restricted cash). The slowdown in activity has resulted in the release in working capital and reduction in purchase from rental assets benefitting the cash flow generation. The liquidity assessment does not take into account the maturity of BrightHouse's GBP220 million 7.875% senior secured notes due in May 2018 and the associated refinancing risk.

The PDR is downgraded to B3-PD to align it with the CFR.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook is driven by the risk associated with the refinancing of the notes in a situation of uncertainty surrounding the company's prospects if it fails to curtail customer loss. The outlook also reflects a possibility of further rulings from the FCA being negative for the industry or BrightHouse as part of the authorization process.

WHAT COULD CHANGE THE RATING UP/DOWN

Given negative outlook the positive pressure on the ratings is unlikely. However, it could be exerted if, as a result of better than expected operational performance leading to improvement in profitability and customer retention, Moody's adjusted leverage declined below 5.0x and EBIT/Interest expense increased above 1.5x.

Conversely, there could be downward pressure if the company fails to curtail customer loss and reduction in contract portfolio in the short-term leading to further deterioration in financial metrics.

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

BrightHouse Group PLC, based in Watford, is a leader in the rent-to-own market in the United Kingdom, with 312 stores as of 1 October 2016. For the last twelve months ended 1 October 2016, the company reported revenues of GBP361 million.

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.

Tanya Savkin
Vice President - Senior Analyst
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

Richard Etheridge
Associate Managing Director
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

No Related Data.
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