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Rating Action:

Moody's downgrades Casino's ratings to B1; negative outlook

31 May 2019

Paris, May 31, 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 B1 from Ba3 and its probability of default rating (PDR) to B1-PD from Ba3-PD. Moody's has also downgraded Casino's senior unsecured long-term ratings to B1 from Ba3, its senior unsecured MTN program rating to (P)B1 from (P)Ba3, the deeply subordinated perpetual bonds' rating to B3 from B2. In addition, Moody's has affirmed the Not Prime commercial paper rating and the (P)NP short term rating program. The outlook remains negative.

"We believe that the debt restructuring of Casino's main shareholder Rallye and of its controlling holding companies creates additional uncertainty at a time when trading conditions in the French retail market remain highly challenging and increases the execution risk of Casino's deleveraging," says Vincent Gusdorf, a Moody's Vice President -- Senior Credit Officer and lead analyst for Casino. "The safeguard proceedings process launched by its parent holding company Rallye means Casino will need to maintain suppliers' and lenders' confidence and good liquidity, while our previous Ba3 rating was factoring in a substantial reduction of its high gross debt," Mr. Gusdorf added.

RATINGS RATIONALE

The weakening credit quality of Casino's controlling holdings, and notably of its immediate parent Rallye, has been a key driver of previous negative rating actions on Casino. Still, Moody's has maintained a certain delinkage between Casino's rating and the credit quality of its parent companies to account for the protection stemming from minority shareholders and the absence of cross default between Casino's debt and that of Rallye.

In the long-term, a reduction in Rallye's excessive leverage which would not affect Casino would be credit positive. In the short-term though, Moody's believes that Rallye's debt restructuring creates meaningful uncertainty for Casino at a time when its leverage remains above appropriate levels for a Ba3 rating and its revenue is stagnating in France.

Casino's controlling holdings, namely Rallye, Foncière Euris, Finatis and Euris, announced on 23 May 2019 that they had filed for safeguard procedure under French law. Under this framework, creditors' rights will be frozen for at least six months during which the holdings will design debt restructuring plans with the help of administrators appointed by the Paris Commercial Court. Together, Rallye, Foncière Euris, Finatis and Euris held EUR3,295 million of net debt as of 31 December 2018.

Moody's considers that potential developments affecting Casino's shareholding structure and the debt of its parent holding companies increase uncertainties on the deleveraging path of Casino and could cause reduced creditors confidence and governance challenges. Casino's Chief Executive Officer remains the chairman of Rallye's board and the direct or indirect main shareholder of Foncière Euris, Finatis and Euris. In Moody's view, this situation is also credit negative because it could likely distract management at a time when the French market remains challenging and the execution of the company's strategy requires the full attention of Casino's Board and management team. Moreover, like other retailers, Casino has large trade payables, which amounted to EUR6.7 billion at year-end 2018 on a fully consolidated basis, and the company is therefore required to maintain suppliers' confidence particularly in light of its uneven working capital performance in recent years.

In France, revenues at most of Casino's store brands stagnated on a like-for-like basis during the first quarter of 2019 ended on 31 March. According to research firm Kantar Worldpanel, Casino's market share in France was down by 50 basis points year-on-year over the three-month period ending on 7 May 2019, although part of the decline was due to store closures.

Although Moody's recognises that Casino's French operations had EUR2,097 million of cash on the balance sheet as at 31 December 2018 and upcoming asset disposals could yield up to about EUR1,800 million of proceeds by the first quarter of 2020 if the divestment program continues to be executed successfully, Moody's anticipates limited outright debt repayments as Casino focuses on maintaining its good liquidity buffer. At year-end 2018, Casino France had EUR2,865 million of undrawn committed credit facilities, while a EUR675 million bond will mature in August 2019 and another EUR497 million bond will become due in March 2020. The rating agency forecasts limited deleveraging in 2019, with a Moody's-adjusted debt/EBITDA of 6.2x at year-end, compared to 6.4x in 2018, well above Moody's expectations for the previous Ba3 rating, with an expected leverage moving towards 5.5x.

While Rallye's debt repayment freeze might alleviate pressure on Casino to pay large dividends, the benefit may be short-lived as dividends could be required going forward to serve holding companies' debts after their likely restructuring. In 2018, Casino France paid EUR400 million of dividends, of which about EUR207 million to Rallye, compared to an operating cash flow after interests and taxes that the rating agency estimates at EUR253 million. That said, Moody's forecasts that free cash flows will be at best close to zero in 2019 under its calculations even if dividends were halved, assuming that payment terms to suppliers do not change significantly. The effects of possible changes in Casino's shareholding structure on its financial policy are also uncertain.

STRUCTURAL CONSIDERATIONS

Casino's debt is located at the level of Casino France (EUR5.9 billion as of 31 December 2018), the Brazilian subsidiary GPA (EUR1.2 billion), the Colombian subsidiary Exito (EUR1.0 billion) and the Latin American holding Ségisor (EUR0.4 billion). There is no cross-default clause or guarantees between these subsidiaries. Moody's considers all the debt instruments to be unsecured and to rank pari passu within each subsidiary, with the exception of deeply subordinated perpetual bonds issued by Casino France, which amounted to EUR1.35 billion at year-end 2018.

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

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects Moody's view that the debt restructuring of holding companies will constrain Casino's deleveraging and may distract management at a time when the group faces meaningful challenges in France, its main market. The debt restructuring could also affect suppliers' and lenders' confidence and creates uncertainties around Casino's future capital structure and financial policy.

WHAT COULD CHANGE THE RATING UP/DOWN

Further negative pressure on the ratings could materialize if Casino failed to reduce its Moody's-adjusted debt/EBITDA below 6x or to improve French operations' free cash flow, excluding proceeds from asset disposals. Moody's could also downgrade Casino if suppliers reduced payment terms or if the debt restructuring of the group's controlling holdings had unexpected negative consequences for Casino's creditors. Lastly, Moody's could take a negative rating action if Casino reduced its operating or geographic diversity without repaying a large portion of its gross debt.

Although an upgrade is currently unlikely, Moody's could raise Casino's ratings if it lowered its Moody's-adjusted debt/EBITDA comfortably and sustainably below 5.5x, while maintaining adequate liquidity including sufficient cash balances and assuming that the group structure does not change. An upgrade would also be contingent on a significant improvement in French operations' cash flows, excluding proceeds from asset disposals, with sufficient comfort that the holdings' debt restructuring will not affect Casino's capital structure or relationships with its creditors.

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 Groupe Rallye, which owned 51.7% of Casino's capital and 63.0% of its voting rights as of 31 December 2018. Casino's Chief Executive Officer (CEO) Jean-Charles Naouri controls Groupe Rallye through a cascade of holdings. On 23 May 2019, Casino's controlling holdings namely Rallye, 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 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.

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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.

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

Yasmina Serghini, CFA
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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