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Rating Action:

Moody's downgrades OGF (Obol France 2 SAS)'s CFR to B3; stable outlook

18 Sep 2019

Milan, September 18, 2019 -- Moody's Investors Service ("Moody's") has today downgraded the corporate family rating (CFR) of Obol France 2 SAS (a holding company owner of French funeral operator OGF) to B3 from B2, and its probability of default rating (PDR) to B3-PD from B2-PD. Concurrently, Moody's has also downgraded to B3 from B2 the ratings on the EUR960 million senior secured Term Loan B due March 2023 and the EUR60 million senior secured revolving credit facility (RCF) due December 2022, both borrowed by Obol France 3 SAS, which is fully owned by Obol France 2 SAS. The outlook on both entities remains stable.

"We expect OGF's earnings to remain under pressure through the fiscal year ending (FYE) March 2020 because of increased competition in the French funeral market, low mortality rates and lower than planned cost-savings achieved," says Giuliana Cirrincione, Moody's lead analyst for OGF. "As a result, we expect that OGF's leverage (measured as Moody's-adjusted gross debt to EBITDA) will remain above 6.5x over the next two years, a level which is not commensurate with the prior B2 rating," adds Mrs. Cirrincione.

RATINGS RATIONALE

The rating action reflects OGF's continued operating underperformance versus its budget and versus Moody's expectations since 2018, which has led to a spike in the gross debt to EBITDA ratio (including Moody's-adjustments) to 7.2x in the FYE March 2019, from 6.7x the year before. This is well above Moody's threshold of an adjusted leverage of 6.0x expected for OGF to maintain a B2 rating. The rating agency also expects deleveraging to be slow, with an adjusted gross debt to EBITDA ratio estimated to remain at or slightly above 7.0x-7.2x through March 2020, and to progressively trend towards 6.5x by December 2021 or early 2022.

OGF's revenue and EBITDA (as reported by the company) in the 4 months to July 2019 was lower than the same period the year before (-3% and -10%). Being the largest vertically integrated funeral operator in France, OGF has seen its market share in terms of volumes declining to 19.5% in June 2019 from 20.1% the year before, as a result of aggressive expansion strategies pursued by competitors. This was also exacerbated by persistently low mortality rates in the country, which in 2018 and 2019 have remained well below the long-term trend of 0.7%. Stiff competition has also limited OGF's ability to complement organic growth with M&A opportunities.

Lastly, operating underperformance also reflected some pressure from cost inflation and delays in the implementation of productivity-enhancing initiatives that were supposed to support EBITDA growth in a context of declining volumes. Moody's believes that OGF will be able to maintain its leading market position and pricing power, but also recognizes that cost-saving measures are subject to a degree of execution risk and may require a longer time horizon to be achieved.

More positively, OGF's cash flow generation has remained good despite decreasing EBITDA. Moody's expects continued positive free cash flow (i.e. before acquisition spending) in the range of EUR15 million-EUR20 million annually, on the back of manageable working capital needs and capex levels (i.e. around EUR40 million-EUR45 million per year on average). In addition, Moody's expects the company to have a prudent approach to M&A -- which will continue to be a driver of earnings growth - without impairing the company's liquidity position.

Despite a low cash balance of EUR4 million as of July 2019, OGF's liquidity is supported by its committed EUR60 million revolving credit facility (RCF), fully available and expected to remain undrawn, except for temporary limited drawings to finance M&A or project-based capex. Access to the RCF is subject to a net leverage springing covenant of 9.45x to be tested when the facility is 35% or more drawn, under which the company will maintain ample flexibility.

Moody's would like to draw attention to certain governance considerations with respect to OGF. The company, which is tightly controlled by Ontario Teachers Pension Plan (OTPP), has a high tolerance for leverage. However, Moody's also acknowledges the positive track record of OGF in terms of prudent liquidity management and business acquisition strategy.

OGF's B3 ratings remain supported by (1) its leading market position in France and the defensive long-term dynamics of the funeral industry, with an ageing population; (2) its solid margins, underpinned by an integrated business model and positive track record in upselling and implementing price increases; and (3) the successful integration of bolt-on acquisitions in the past.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectations that OGF will stabilise its earnings by defending its market share and pricing power, and via cost-saving measures, with a Moody's-adjusted gross debt to EBITDA ratio trending towards 6.5x over the next couple of years. Expectations also include a cautious approach to M&A opportunities, a good liquidity profile, and positive cash flow generation.

WHAT COULD CHANGE THE RATING UP/DOWN

Ratings could be upgraded in case of higher than anticipated earnings growth, leading the Moody's-adjusted gross debt to EBITDA ratio to move sustainably below 6.0x. A positive rating action would also require the company to maintain positive free cash flow generation.

Downward pressure could materialise if OGF fails to reduce its leverage from current levels, as a result of continued competitive pressure and lack of progress in implementing cost-saving initiatives. The ratings could also be downgraded if OGF's free cash flow turns negative or if its liquidity deteriorates significantly, in case of material shareholder distribution or more aggressive acquisition spending.

LIST OF AFFECTED RATINGS

..Issuer: Obol France 2 SAS

Downgrades:

.... LT Corporate Family Rating, Downgraded to B3 from B2

.... Probability of Default Rating, Downgraded to B3-PD from B2-PD

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Obol France 3 SAS

Downgrades:

....Senior Secured Bank Credit Facility, Downgraded to B3 from B2

Outlook Actions:

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Paris, OGF's activities include funeral services and monuments and other activities comprising cemetery works, crematoria management, pre-need services and coffins manufacturing. In the last twelve months (LTM) ended 31 July 2019, OGF generated revenues of €615 million (LTM July 2018: 620 million) and EBITDA, as reported by the company, of €136 million (LTM July 2018: 147 million). Since 2017, Ontario Teachers Pension Plan (OTPP) is the reference shareholder of OGF, with approximately 75% of shares.

REGULATORY DISCLOSURES

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 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.

Giuliana Cirrincione
Analyst
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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