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26 Aug 2019
Paris, August 26, 2019 -- Moody's Investors Service ("Moody's") has today downgraded the long-term
corporate family rating (CFR) of Hornbach Baumarkt AG ("Hornbach" or the
"company"), the German DIY-store chain, to Ba3 from
Ba2. Concurrently Moody's downgraded the company's Probability
of Default Rating (PDR) to Ba3-PD from Ba2-PD while it affirmed
the Ba2 rating on the EUR250 million worth of senior unsecured notes due
in 2020 (the "Bond"). The outlook was changed to negative
Today's downgrade to Ba3 reflects Hornbach's higher-than-expected
gross adjusted debt, which will increase Moody's gross adjusted
leverage to around 5.5x in fiscal 2019, substantially higher
than the 4.0x Moody's anticipated. Moody's only
expects leverage to strengthen towards 5.0x in fiscal 2020.
Hornbach's absolute EBITDA generation is forecast by Moody's
to improve over the next 12-18 months, but not sufficiently
to offset the higher-than-expected gross debt. Hornbach
continues to face margin pressures, EBIT/interest is weak at below
2.0x and the company's high capital expenditure continues
to put pressure on free cash flow (FCF) due to the company's growth
The main reasons for the higher-than-expected gross adjusted
debt, and increase in leverage to around 5.5x in fiscal 2019
are: (i) the issuance of EUR295 million worth of promissory notes
("promissory notes") in fiscal 2018 and Moody's expectation
that the company may need to issue additional debt to finance its growth
strategy despite the fact that the company has said the promissory notes
are to pre-finance the EUR250 million Bond maturing in February
2020; and (ii) the introduction of IFRS 16, which Moody's
expects will to lead to capitalized operating lease liability of EUR1,193
million, around EUR362 million higher than Moody's current operating
lease adjustment of EUR831 million.
The Ba2 rating on the Bond is one notch higher than the CFR reflecting
that the promissory notes are not guaranteed by Hornbach's operating
subsidiaries and therefore subordinated to the Bond.
The downgrade primarily reflects the increase in Hornbach's reported
financial debt to EUR762 million in fiscal 2018 from EUR424 million in
fiscal 2017 to fund ongoing development capex in new stores, real
estate and digitalization projects, which lead to negative free
cash flows in fiscal 2018. Despite the maturity of the EUR250 million
Bond maturing in February 2020, Moody's expects Hornbach's
reported financial debt is likely to remain at a similar level over the
next 12 to 18 months in order that the company can finance new store openings
and other capital expenditure and at the same time, maintain a cash
balance of at least EUR100 million. The increase in financial debt
is to some extent compensated by the company's EUR313 million cash
balance as of May 2019 and the company's good liquidity especially
given the company has evidenced a conservative financial policy to date.
Moody's does not expect Hornbach would use cash to make sizeable
acquisitions or increase dividend payments.
Hornbach's expected increase in leverage is also driven by the application
of IFRS16 accounting standard, which the company estimates would
have increased financial debt by EUR1,193 million in fiscal 2018.
This amount is around EUR362 million higher than the EUR831 million debt
adjustment that Moody's made for the capitalization of operating
leases in fiscal 2018. The main reason for this difference is that
the previous disclosure of undiscounted future lease payments did not
capture certain renewal options of existing lease contracts, which
the company has decided are "reasonably certain" to be exercised.
When IFRS16 becomes effective in fiscal 2019, Moody's estimates
that this will increase Hornbach's Moody's adjusted debt to EBITDA
by around 1.0x to around 5.5x. Moody's considers
that the adoption of IFRS16 represents material new information that the
agency didn't have before.
The downgrade also reflects continued margin erosion in part driven by
operating cost increases and partly driven by intense competition in the
German DIY market. Moody's Adjusted EBIT margin declined
to 2.8% from 3.6% in fiscal 2017, which
is lower than historical levels and lower than the 3% Moody's
expected. Interest cover (as measured by Moody's Adjusted
EBIT to Interest Expense) also deteriorated to 1.8x in fiscal 2019
from 2.4x in fiscal 2018. Moody's expects some recovery
in EBITDA over the next 12-18 months as turnover should continue
to grow at mid-single digits. This is supported by the company's
solid Q1 2019 results, where revenues and EBITDA grew 8.5%
and 17% (excluding the impact of IFRS16) despite more challenging
macroeconomic conditions. Hornbach also expects to improve its
cost base such that margins stabilise. The EBITDA increase is expected
to drive leverage reduction towards 5.0x by fiscal 2020.
Hornbach's CFR is also constrained by (1) intense competition in
the do-it-yourself (DIY) industry in Germany and the high
level of digitalisation costs; (2) Hornbach's relatively small
size compared with other European retailers; and (3) high level of
capital spending associated with new store openings, which leads
to negative free cash flow generation.
However the Ba3 CFR is supported by (1) strong position in its domestic
market and good geographical diversification across Europe; (2) positive
underlying growth, as reflected by its ability to outperform the
market; and (3) a good liquidity profile, which is underpinned
by the company's commitment to maintaining a conservative financial
Hornbach's liquidity profile is good as it benefits from around EUR313
million cash on the balance sheet as of 31 May 2019 and an undrawn committed
EUR350 million five-year revolving credit facility maturing in
December 2023. The company's liquidity would be sufficient
to refinance the EUR250 million worth of senior unsecured notes maturing
The Bond's Ba2 rating is one notch above the company's CFR because
they benefit from senior guarantees from Hornbach's operating subsidiaries.
These operating subsidiaries account for almost all of the company's tangible
net assets and EBITDA. The EUR 295 million promissory notes issued
in fiscal 2018 are not guaranteed by Hornbach's operating subsidiaries
and are therefore subordinated to the Bond.
The Ba3-PD probability of default rating, in line with the
CFR, reflects Moody's assumption of a 50% family recovery
rate, typical for secured bond structures with a limited set of
financial covenants. Some of the facilities contain financial covenants
(interest coverage of at least 2.25x and equity ratio of at least
25%), which the company has been able to meet comfortably
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects Moody's expectations that the company's
leverage will increase to around 5.5x in fiscal 2019 and that that
the company will need to sustainability grow its revenues and earnings
in the next 12 to 18 months to reduce leverage towards 5.0x,
a level which is commensurate with the current Ba3 CFR.
The outlook could be stabilized if in the next 12 to 18 months the company
shows evidence that Moody's adjusted debt/EBITDA will trend towards
5.0x driven by an ongoing and sustainable increase in earnings
and improvement in the company's FCF and interest cover, which
are currently weak.
WHAT COULD CHANGE THE RATING UP/DOWN
The company is weakly positioned in the Ba3 rating category and as such,
an upgrade is unlikely in the short term. Upward pressure on the
ratings in the medium term could be exerted as a result of Hornbach's
financial leverage decreasing below 4.5x on a sustained basis.
A higher rating would also require the company to strengthen its Moody's
adjusted EBIT margin above 4% on a sustained basis and the generation
of positive FCF.
Conversely, downward pressure could be exerted on the ratings as
a result of Hornbach's financial leverage failing to trend towards 5.0x
supported by growing underlying revenues and profits. Downward
pressure could also be exerted if interest cover decreases below 1.5x,
if FCF remains negative and if the company's liquidity deteriorates.
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.
Hornbach Baumarkt AG (Hornbach) is a mid-sized DIY retailer mainly
operating in Germany, with 97 stores as of the end of fiscal 2018,
and other European countries, including Austria (14), the
Netherlands (14), the Czech Republic (10), Switzerland (7),
Romania (6) Sweden (6), Slovakia (3) and Luxembourg (1).
The company reported sales of €4.1 billion as of the end of
Hornbach's shares are listed on the Frankfurt Stock Exchange. Hornbach's
parent company, Hornbach Holding AG & Co. KGaA,
owns 76.4% of Hornbach's share capital, while independent
investors own 23.6%. In turn, the Hornbach
family owns 37.5% of Hornbach Holding's total share capital,
and the remaining 62.5% are free float.
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
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For any affected securities or rated entities receiving direct credit
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Asst Vice President - Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yasmina Serghini, CFA
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Moody's France SAS
96 Boulevard Haussmann
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
No Related Data.
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