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
