London, 03 October 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 B2 from B1 and the rating on its GBP220 million senior secured
notes to B2 from B1. The outlook on all ratings has changed to
negative from stable.
Today's rating action primarily reflects the following drivers:
- Weakening of the company's credit metrics driven by regulatory
changes and adverse product mix
- Moody's expectation of further negative pressure on the
company's business
- Upcoming refinancing risk on its senior secured notes maturing
in May 2018
Concurrently, Moody's has affirmed BrightHouse's probability
of default (PDR) at B1-PD.
RATINGS RATIONALE
The company's performance has been adversely affected by regulatory
changes following the ongoing review of the business by the Financial
Conduct Authority (FCA) as part of its authorization process. The
changes so far included 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 costs. The company's topline declined
by 4% quarter-on-quarter during the quarter ended
June 2016 whereas LTM June 2016 EBITDA (defined by management) declined
to GBP52 million from GPB56 million in financial year ended March 2016
(FY16). This included an impact from the company's decision
to temporarily suspend the charging of late fees, shift in sales
mix towards more short-term, technology products and high
price deflation on furniture and electrical products. Furthermore,
total number of customers declined year-on-year by 5%
to approximately 263 thousand at the end of June 2016 and contract portfolio,
defined as an aggregate amount of remaining payments due under hire purchase
agreements on a given date, if they run to full term, declined
year-on-year by 13%.
Moody's adjusted gross debt / EBITDA rose to 4.6x as of June
2016 from 4.2x as of the end of March 2016 and Moody's expects
further increase towards 5.0x by the end of FY17. Moody's
incorporates some further negative impact from the FCA authorization process
in its expectations, although at this stage this is difficult to
assess.
The B2 CFR 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 three years with the right to purchase at
the end of the contract, differentiating it from most mainstream
retailers; (iii) growth potential of rent-to-own industry
fundamentals supported by limited disposal income of consumers and limited
competition from other forms of credit financing which we expect to continue,
although at a much slower pace as the market matures.
The rating is constrained primarily by (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 BrighHouse'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,
so far well managed.
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 June 2016, the company
reported cash on balance sheet of GBP55million (including GBP10 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. Given the recent trading performance
and the tougher regulatory environment, the company may incur higher
cost on its debt than current notes carry upon refinancing.
The PDR is affirmed at B1-PD due to a 35% recovery rate
applied to all-bond debt structure.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook is driven by Moody's expectation of further
pressure on the company's top line and profitability driven by regulatory
changes and adverse product mix, partially offset by the company's
efforts to adapt to regulatory pressures and further cost savings initiatives.
The outlook also reflects the uncertainty surrounding further impact from
the FCA authorization process. Furthermore, negative outlook
reflects the risk of refinancing of its debt maturing in May 2018.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the 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 4.0x and EBIT/Interest expense increased
towards 2.0x.
Conversely, there could be downward pressure if, as a result
of failing to curtail customer loss and contract portfolio contraction,
Moody's adjusted leverage were to rise sustainably above 5.0x
or EBIT/Interest expense declined substantially below 1.5x or if
liquidity concerns arise.
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.
CORPORATE PROFILE
BrightHouse Group PLC, based in Watford, is a leader in the
rent-to-own market in the United Kingdom. For the
last twelve months ended 2 July 2016, the company reported revenues
of GBP358 million, with 312 stores as of 30 April 2016.
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