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Rating Action:

Moody's downgrades Hornbach's ratings to Ba2, stable outlook

20 Dec 2018

Paris, December 20, 2018 -- 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 Ba2 from Ba1. Concurrently Moody's downgraded the company's Probability of Default Rating (PDR) to Ba2-PD from Ba1-PD and the rating on the EUR250 million worth of senior unsecured notes due in 2020 to Ba2 from Ba1. The outlook is stable.

"Today's downgrade to Ba2 reflects Hornbach's weaker-than-expected profitability and the resulting deterioration in credit metrics to levels inconsistent with the Ba1 rating" says Francesco Bozzano, lead analyst for Hornbach. "The stable outlook factors in the expectation that the company will be able to gradually improve its profitability from the current low level while maintaining adequate liquidity", Mr. Bozzano added.

RATINGS RATIONALE

The downgrade reflects the deterioration in Hornbach's profitability on the back of ongoing cost increases and intense competition that has created pressure on margins, with limited prospects of rapid recovery. On 10 December, Hornbach revised its profit guidance for the year by over 10%. As a consequence, Moody's expects that the company's leverage, as measured by Moody's Adjusted (gross) Debt/ EBITDA will increase to 4.1x in the year ending February 2019 (fiscal 2018), a level which is not consistent with the Ba1 rating, while the company's cash balance has eroded, implying a more pronounced deterioration of the net leverage. The rating agency anticipates that adjusted gross leverage will not improve in the next 12-18 months. The deteriorating performance and in turn the increase in leverage is the result of procurement and operating costs increases which Moody's expects will reduce fiscal 2018 EBITDA to around EUR160 million, compared to around EUR173 million in fiscal 2017.

Despite positive sales growth of around 5% in the first nine months of fiscal 2018, the company's procurement and operating costs have increased at a faster pace. Procurement cost increase, mainly related to shipping costs and raw material cost inflation intensified in Q3 of fiscal 2018 leading the company to issue a profit warning on 10 December 2018. These add to the ongoing pressure on margins from digitalization cost increases (mainly customer service, personnel costs for running the e-business, IT infrastructure/ technology) and store refurbishment costs.

Moody's expects some recovery in EBITDA in the next 12-18 months as sales should continue to moderately grow despite more challenging macroeconomic conditions and costs are expected to stabilize, although this will not be sufficient to reduce leverage below 4.0x since Moody's expects that the modest recovery in EBITDA in the next 12-18 months will be offset by some debt drawing necessary to compensate for the expected negative free-cash flow and to maintain a cash balance of around EUR 100 million in fiscal 2018.

Hornbach's liquidity profile is adequate as it benefits from around EUR96.6 million cash on the balance sheet as of 31 August 2018 and an undrawn committed EUR350 million five-year revolving credit facility maturing in December 2023. Moody's expects the company to refinance the EUR250 million worth of senior unsecured notes well in advance of their maturity in February 2020.

Hornbach's credit profile continues to reflect the company's (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) balanced financial policy with moderate funded debt on its balance sheet, although the company's cash balance has come down over the last few years.

However, the rating is constrained by the company's (1) weakened profitability due to intense competition in the do-it-yourself (DIY) industry in Germany and the high level of digitalisation costs; (2) gross adjusted financial leverage of 4.1x, as measured by Moody's Adjusted Debt/EBITDA, in fiscal 2018; (3) relatively small size compared with other European retailers; and (4) high level of capital spending associated with new store openings, which lead to negative free cash flow generation.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook is predicated on the expectation of a slightly improving trend in profitability over the next 12-18 months and a broadly stable leverage around 4.1x. The stable outlook reflects also Moody's expectation that Hornbach will maintain sufficient liquidity and will refinance at least partly the EUR250 million worth of senior unsecured notes well in advance of their maturity in February 2020.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the ratings in the medium term could be exerted as a result of Hornbach's financial leverage decreasing below 4.0x 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 to generate positive free cash flow.

Conversely, downward pressure could be exerted on the ratings as a result of Hornbach's financial leverage increasing above 4.5x, or in case of further margin pressure due to adverse market conditions. Whilst not expected, material debt-funded acquisitions or shareholder return initiatives would also increase downward pressure on the rating.

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.

CORPORATE PROFILE

Hornbach Baumarkt AG (Hornbach) is a mid-sized DIY retailer mainly operating in Germany, with 98 stores as of the end of fiscal 2017, and other European countries, including Austria (14), the Netherlands (13), the Czech Republic (10), Switzerland (6), Romania (6) Sweden (5), Slovakia (3) and Luxembourg (1). The company reported sales of €3.9 billion as of the end of fiscal 2017, an increase of 5.0% from the previous year.

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.

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.

Francesco Bozzano
Analyst
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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