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Rating Action:

Moody's downgrades New Look's CFR to Caa2; negative outlook

08 Dec 2017

London, 08 December 2017 -- Moody's Investors Service has downgraded to Caa2 from Caa1 the Corporate Family Rating (CFR) of UK apparel retailer New Look Retail Group Limited (New Look or the company). Concurrently, the rating agency has downgraded New Look's probability of default rating (PDR) to Caa2-PD from Caa1-PD. Moody's has also downgraded the ratings of the GBP700 million and the EUR415 million senior secured notes due in July 2022 issued by New Look Secured Issuer plc to Caa1 from B3 and the rating of the c. GBP177 million outstanding senior unsecured notes due in July 2023 issued by New Look Senior Issuer plc to Ca from Caa3. The outlook on all ratings has changed to negative from stable.

"Our decision to downgrade New Look's ratings reflects our expectations that, after a particularly weak second quarter, results in the second half of the company's fiscal year will also fall well short of last year. Following changes to the senior management team, New Look is seeking to refocus on its historic value-based broad appeal. However this strategy will take time, and the path towards a meaningful recovery in profitability is uncertain. Therefore, the negative outlook on the company's ratings reflects the risk that, despite the company's currently adequate liquidity, the capital structure may in due course prove unsustainable," says David Beadle, a Moody's Vice President - Senior Credit Officer and lead analyst for New Look.

RATINGS RATIONALE

New Look's results for the first half of its fiscal year to March 2018 (FY18) fell short of Moody's previous expectations. The rating agency now expects a further material year-on-year deterioration in performance in the second half such that New Look's reported EBITDA for FY18 will be in the region of GBP50 million. This is significantly lower than the GBP155 million recorded in FY17, which already represented a sizeable fall from the GBP227 million achieved in FY16. This severely depressed level of profitability is insufficient to cover New Look's annual interest expenses of around GBP75 million and underlying capex requirements, which the rating agency estimates to be at least GBP30 million a year. However, Moody's believes New Look's liquidity remains adequate for the time being. The rating agency positively notes the company started the fiscal year with cash of over GBP70 million, and retains full access to its GBP100 million revolving credit facility which remained undrawn at the half year. Moreover, the company announced last month that agreement had been reached with its core operational bank to increase bi-lateral liquidity, trade and import facilities to GBP100 million on a fully committed basis (subject to documentation and customary conditions), from GBP78 million on an uncommitted and on demand basis at the half year. Management report that relationships with key suppliers remain strong with no changes to credit terms; Moody's notes the importance for New Look's liquidity profile of this remaining the case.

There have recently been a number of changes to New Look's executive management team, most notably the departure of CEO Anders Kristiansen at the end of August, after nearly five years in the role, and the return of Alistair McGeorge as Executive Chairman in November, a position he held for three years from 2011. The Founder, Tom Singh, has also once more taken an active role on the product side, alongside Chief Product Officer, Roger Wightman, who had previously announced a decision to step away from executive duties. In the H1 results presentation, led by McGeorge, bond investors were told that over the last couple of years the company had alienated core customers by moving away from the historic strategy of valued-based broad appeal, with products becoming overly fashionable, young and edgy. Numerous other issues were cited including: being late to some trends; lower flexibility and speed; excessive product options; failure to clear previous season stock quickly enough; and insufficient cost control. The highly competitive market dynamics will have compounded these self-inflicted problems. Moody's believes changes to strategy to reposition products fashion content and value proposition will, if successful, take time to gain traction and thus lead to an improvement in sales and profitability. In the meantime, the company will continue to face various challenges including pressures on its cost base, notably in respect of the National Living Wage, weak consumer sentiment in its core UK market, which will limit demand for apparel, and highly competitive market dynamics, particularly with respect to online specialists.

Moody's believes New Look's current capital structure will become unsustainable if reported EBITDA remains less than GBP200 million in the medium term. However, provided the revisions to strategy can lead to a return to reported EBITDA of more than GBP100 million in FY19 the company should be able to maintain adequate liquidity, subject to working capital remaining broadly neutral. Thereafter, New Look would still have some time to grow back into the current capital structure as it has no term debt maturities until 2022.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative rating outlook reflects the risk that a failure to achieve a meaningful recovery in profitability during the course of 2018 could lead to a restructuring of New Look's current capital structure within the next 12-18 months.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating is unlikely in the short term but in due course could arise if the company showed signs that a sustainable recovery in profitability could be achieved and a sustainable return to positive free cash flow was evident.

Downward pressure on the rating could arise if New Look's liquidity deteriorated or if profitability does not show signs of recovery during the course of 2018, or if the likelihood of a default increased further.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in London and Weymouth (with its registered office in Weymouth, UK), New Look Retail Group Limited is a value fashion retailer selling a range of apparel, accessories and footwear, primarily for women. As at 23 September 2017, New Look operated 896 stores under the New Look brand: 596 directly-operated stores in the UK; 84 stores in Europe (Ireland, France, Belgium and Poland); 133 stores in China; and 83 franchise stores (predominantly in the Middle East). In the last twelve months ended 23 September 2017, New Look recorded revenues and reported adjusted EBITDA of GBP1.42 billion and GBP92 million respectively.

Since June 2015 the business has been majority owned by South African investment firm Brait SE. The family trusts of founder Tom Singh and certain members of the management reinvested alongside Brait.

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.

David Beadle
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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 Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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