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Rating Action:

Moody's downgrades Casino's CFR to B2; CFR on review for further downgrade in relation with refinancing risk

23 Oct 2019

Moody's also downgrades unsecured debt ratings to B3; assigns B1 secured debt ratings

Paris, October 23, 2019 -- Moody's Investors Service ("Moody's") has today downgraded French grocer Casino Guichard-Perrachon SA's (Casino) long-term corporate family rating (CFR) to B2 from B1 and its probability of default rating (PDR) to B2-PD from B1-PD. Moody's has also downgraded Casino's senior unsecured rating to B3 from B1, its senior unsecured MTN program rating to (P)B3 from (P)B1, and the deeply subordinated perpetual bonds' rating to Caa1 from B3. In addition, Moody's has affirmed the Not Prime commercial paper rating and the (P)NP short term program rating.

Concurrently, Moody's has assigned a B1 rating to the EUR750 million senior secured term loan B to be issued by Casino and a B1 rating to the EUR750 million senior secured instrument to be issued by Casino's subsidiary Quatrim S.A.S.

The CFR and PDR were simultaneously put under review for further downgrade reflecting the execution risk of the new transaction. Instrument ratings have not been placed on review for downgrade. Casino's outlook has been changed to ratings under review from negative.

"We have downgraded Casino's corporate family rating because we expect its gross adjusted leverage to continue to exceed 6x over the next 18 months. This is a level more commensurate with a B2 rating when also considering Casino is not generating positive free cash flow, despite the company's scale and market positions," says Vincent Gusdorf, a Moody's Vice President -- Senior Credit Officer and lead analyst for Casino. "The review for downgrade reflects Moody's view that Casino's liquidity could deteriorate in the near term if the planned refinancing does not proceed as expected," Mr. Gusdorf added.

RATINGS RATIONALE

Casino plans to issue a EUR750 million senior secured term loan B and a EUR750 million senior secured instrument maturing in 2024. It intends to use the proceeds to repay existing debt. Casino also proposes to negotiate a new senior secured revolving credit facility of about EUR2,000 million maturing in 2023 to replace its previous facilities expiring between 2019 and 2022.

Assuming the repayment of overdrafts and commercial paper, Moody's estimates that Casino France's debt will only fall to about EUR7,200 million on 31 December 2019 (including subordinated bonds and excluding fair value hedges), compared to about EUR7,300 million on 31 December 2018, while the rating agency previously expected a decline. As a result, the rating agency now forecasts that Casino's Moody's-adjusted gross debt/EBITDA ratio will remain at about 6.5x over the next 12 months, while Moody's previously expected leverage to decline towards 6.2x in 2019 and 5.5x in 2020. Assuming a proportional consolidation of Latin American subsidiaries, Moody's estimates that leverage is even be higher, at around 7.5x-8x in 2019.

The level of absolute debt and gross adjusted leverage is considered high given that the operating environment will continue to pressure margins over the next 12-18 months. Moody's forecasts that free cash flow will stay negative even though the company has prudently cut dividends and is reducing capex. Despite the proposed refinancing of Casino's debt, interest payments remain high and will continue to weigh on Casino's operating cash flow.

On the positive side, the documentation of secured debt instruments will contain provisions limiting payments to shareholders, as well as covenants compelling Casino to allocate part of its asset disposal proceeds to debt repayment. This will offset part of the risk that Rallye would extract value from Casino. Moody's highlights that any disposal, which would create new minorities within the group, while positive for liquidity, could have a limited effect on the deleveraging trajectory when assessed on a proportional consolidated basis.

Moody's continues to positively view Casino's good market positions, although its market share in France will decline because of asset sales, and the company's good track record to date in executing disposals, which will be key to the company's ability to reduce debt in the future.

Moody's considers that Casino's liquidity will appear increasingly fragile in 2020 if the refinancing does not go ahead. While Casino France had access to EUR2,719 million of committed undrawn credit facilities as of 30 June 2019, a EUR1,200 million credit facility will mature in February 2021. The planned refinancing aims at extending the credit facility maturity to 2023 and to repay part of upcoming debt maturities.

The rating review process will focus on Casino's ability to successfully implement its refinancing plan because Casino's liquidity would deteriorate if the refinancing does not go ahead and if no alternative solutions are found. While Casino France had access to EUR2,719 million of committed undrawn credit facilities as of 30 June 2019, a EUR1,200 million credit facility will mature in February 2021. The planned refinancing aims at extending the credit facility maturity to 2023 and to repay part of upcoming bond maturities.

ESG CONSIDERATIONS

Although Casino is listed, the group's controlling owner remains Casino's Chief Executive Officer and chairman of Rallye's board. This is despite the ongoing debt restructuring of Casino's controlling holding companies Rallye, Foncière Euris and Finatis. This situation is credit negative because it could distract Casino's management at a time when its full attention is required to address the challenges of the French market.

STRUCTURAL CONSIDERATIONS

Pro forma the proposed refinancing, Casino France would have had EUR7,517 million of debt as at 30 June 2019, including the EUR750 million of senior secured term loan B, the EUR750 million of senior secured instruments, EUR4,059 million of unsecured bonds issued under its EMTN program, EUR167 million of commercial paper and EUR441 million of other debts. The EUR750 million senior secured term loan B as well as the senior secured RCF of about EUR2,000 million have share pledges on key subsidiaries, including Monoprix and Segisor, the holding company owning the shares of Latin American operations. The EUR750 million secured instruments has share pledges on IGC, a subsidiary of Casino owning real estate assets worth EUR1,000 million.

Moody's views the EUR750 million term loan B and the EUR750 million senior secured instruments as having relatively comparable security values and rates them B1, one notch above the CFR. The rating agency considers these instruments as secured but considers the security package as moderate since it is mostly made of share pledges.

The EUR4,059 million unsecured bonds are ranked in second position, and are rated B3, one notch below the CFR. The EUR1,350 million subordinated bonds are the most subordinated class of debt and is rated Caa1, two notches below the CFR.

The probability of default rating is based on a 50% family recovery assumption, which reflects a capital structure including bonds and bank debts with financial covenants.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would lower Casino's CFR to B3 if it fails to extend its debt maturities. If the proposed transaction succeeds, Moody's would confirm the B2 CFR. In that case, maintaining this rating would require Casino to achieve a Moody's-adjusted debt/EBITDA of less than 6.5x at the group level, trending over time to below 6x on the back of gross debt reduction in France. Negative pressure on the ratings would also materialize if Casino fails to improve Casino France's free cash flows after dividends and before asset disposals.

If the refinancing takes place, Moody's may consider a positive rating action over time if Casino demonstrates an ability to reduce substantially and sustainably the gross debt of its French operations, leading to a Moody's-adjusted debt/EBITDA comfortably below 6x and trending towards 5.5x, generating sustainable free cash-flow after having reversed the cash burn of Casino France and while maintaining solid liquidity.

COMPANY PROFILE

With EUR37 billion of reported revenue in 2018, France-based Casino is one of the largest food retailers in Europe. Its main shareholder is the French holding Rallye, which owned 52.3% of Casino's capital and held 61.7% of its voting rights as of 30 June 2019. Casino's chief executive officer Jean-Charles Naouri controls Rallye through a cascade of holdings. On 23 May 2019, Rallye and its controlling holdings, namely Foncière Euris, Finatis and Euris filed for safeguard procedure under French law.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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.

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Vincent Gusdorf, CFA
VP - Sr Credit Officer
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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