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Rating Action:

Moody's downgrades New Look's CFR to Ca; negative outlook

21 Nov 2018

Madrid, November 21, 2018 -- Moody's Investors Service ("Moody's") has today downgraded the Corporate Family Rating (CFR) of New Look Retail Group Limited ("New Look" or "the company") to Ca from Caa2 and its probability of default rating (PDR) to Ca-PD from Caa2-PD. Concurrently, Moody's has downgraded the rating of the GBP700 million and the EUR415 million senior secured notes due in July 2022 issued by New Look Secured Issuer plc to Caa3 from Caa1 and the rating of the GBP176 million outstanding senior unsecured notes due in July 2023 issued by New Look Senior Issuer plc to C from Ca. The outlook on all ratings remains negative.

"Our downgrade reflects New Look's inadequate liquidity profile and the unlikely financial support from its owner, Brait SE, which will lead to a restructuring of the company's unsustainable capital structure," says Victor Garcia Capdevila, Moody's lead analyst for New Look. "Although the turnaround strategic plan put in place by the new senior management team is improving the operating performance, EBITDA will not grow rapidly enough to refinance the current capital structure on reasonable terms and without significant financial losses for bondholders," adds Mr. Garcia.

RATINGS RATIONALE

New Look's internal cash flow generation and its availability under external liquidity and trade and import facilities are not sufficient to service debts and fund working capital and capex requirements.

Cash and cash equivalents as of September 22, 2018 amounted to GBP71.3 million, out of which c.GBP12 million is restricted cash, the GBP100 million revolving credit facility is fully utilized, while the GBP15 million overdraft facility is still available. This translates into a balance of available cash and liquidity facilities of GBP74.3 million as of Q2 2018 compared to GBP196.4 million a year earlier.

The company has GBP85 million of trade and import facilities to fund working capital needs and advance payments to suppliers. The availability under this facility as of Q2 2018 was GBP7.5 million. Overall, New Look's total unrestricted cash, liquidity and operating facilities totaled GBP81.8 million as of Q2 2018, significantly below the GBP230.5 million available in Q2 2017.

Our base case scenario assumes that the company will generate funds from operations of around GBP6 million in the second half of fiscal year 2019 and will have a negative change in working capital of around GBP40 million. Coupled with a committed capital spending of GBP10 million for the rest of 2019 and cash costs of GBP8 million to exit China, this translates into a forecast cash balance of around GBP20 million at the end of fiscal year 2019, which is materially below our assumption of a cash need of at least GBP40 million to run the business through the seasonal cash peaks and troughs. In addition, the GBP15 million overdraft facility and the GBP85 million trade and import facilities mature on 31 January 2019. Although these facilities have been extended for three months, future extensions are not committed and are at the full discretion of banks.

The company's tight liquidity profile is also likely to have a negative effect on its future operating performance due to the lack of necessary investments in IT, digital platforms, marketing and advertisement, store maintenance and refurbishments. It is also hindering the ability of the new management team to maximize the benefits of the turnaround plan.

Brait SE, the owner of New Look, is unlikely to provide financial support to the company. The investment company has written off 100% of its investment in New Look and in the past financial support to the company was in the form of a factoring facility for New Look's receivables at a cost of Libor+2.0%.

Moody's adjusted gross leverage at the time of the acquisition of New Look by Brait SE was 5.5x and it was expected that the company would generate a run-rate reported EBITDA of around GBP230 million. For the last 12 months to September 2018 Moody's adjusted gross leverage and reported EBITDA were 13.2x and negative GBP35 million respectively. The rating agency estimates that reported EBITDA will be around GBP100 million in fiscal year 2019.

The current debt levels are unsustainable. 80% of EBITDA in fiscal 2019 will be absorbed by interest payments, and a liquidity event in the next few months is likely to trigger a restructuring of the capital structure. Moody's considers that in such a scenario recovery rates for senior bondholders are likely to be between 35-65%. This is consistent with a Ca CFR.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the possibility of recovering rates being lower than 35%.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating is unlikely in the short term but could arise if liquidity pressures are resolved and the company shows signs of a sustainable recovery in profitability such that a refinancing of the current capital structure on reasonable terms is achievable.

Downward pressure on the rating could arise if expected recovery rates for financial creditors are less than 35%.

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.

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.

Victor Garcia, CFA
Analyst
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marina Albo
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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​

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