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Rating Action:

Moody's downgrades Ocado's CFR to B2, upgrades senior secured notes rating to Ba2; outlook stable

25 Mar 2020

London, 25 March 2020 -- Moody's Investors Service (Moody's) has today downgraded to B2 from Ba3 the long-term corporate family rating (CFR) and to B2-PD from Ba3-PD probability of default rating (PDR) of UK online grocery retailer and technology-driven software and robotics platform business Ocado Group plc (Ocado or the company). Concurrently the rating agency has upgraded to Ba2 from Ba3 the rating of Ocado's GBP225 million outstanding backed senior secured notes due 2024. The outlook has been revised to stable from rating under review and the rating action concludes the review process initiated by Moody's on 3 December 2019.

RATINGS RATIONALE

Today's downgrade of Ocado's CFR and PDR reflects (a) the doubling of Ocado's total gross debt after the GBP600 million convertible bonds were issued in December; (b) credit metrics which have weakened due to the combination of the higher debt with lower profitability (the latter in part due to the impact of accounting changes); (c) ongoing execution risks with respect to the various commitments to develop online delivery solutions for international partners and to meet continued growth in demand in the UK; and (d) very significant capital spending in respect of those commitments, which will result in the company's high cash balances being depleted in the next two to three years absent a return to the capital markets.

More positively the ratings recognise several positive developments since the original rating assignment in 2017 including (a) contractual agreements to develop online delivery solutions for seven international grocers, which includes a number of fulfilment centres going live this year; (b) a material increase in the company's equity market capitalisation and continuing access to the equity and debt capital markets last evidenced with the convertible bond issuance; and (c) the establishment in early 2019 of a retail joint venture with Marks & Spencer p.l.c. (Baa3 negative) which resulted in a significant cash receipt for Ocado and also secured a new branded grocery supplier ahead of the expiry of the contract with Waitrose later this year. These factors in combination mean that Moody's consider that Ocado's liquidity will remain good during this year and next notwithstanding its major capital spending plans.

Environmental and social considerations do not have a meaningful impact on Moody's assessment of Ocado's current credit quality. However, like all consumer facing businesses the company is exposed to reputational damage in the event its actions harmed customers, or were perceived to harm them. In the short to medium term, subject to its ongoing ability to cope with the unprecedented demand levels, Ocado will be a beneficiary of the impact of Covid-19 as consumers strive to ensure they have sufficient supplies. The crisis has also underpinned the efficiencies inherently embedded in the centralised fulfilment centre model compared with the store-picking model. The rating agency takes Ocado's governance practices into account in its assessment of the company's credit quality, including financial policies. Ocado has primarily used equity to fund its heavy capital spending commitments, and has to date demonstrated a prudent approach to liquidity management.

STRUCTURAL CONSIDERATIONS

The Ba2 rated GBP225 million senior secured notes (SSNs) due 2024 rank pari passu with the company's GBP100 million revolving credit facility which expires in 2022. The three notch uplift in the ranking of the SSNs relative to the CFR reflects the subordination cushion provided by the GBP600 million unsecured convertible bonds due 2025 and the fact that these funds will be used to further develop the Solutions business, a credit positive for the SSNs. Furthermore, Moody's expects the company's cash balances -- which in December 2019 exceeded GBP1.3 billion pro-forma for the proceeds of the convertible bond issue -- to remain in excess of the outstanding SSN balance beyond the end of 2021.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectations that the company will over the next 12-18 months maintain an at least adequate liquidity profile. In addition, the rating agency expects the company to retain full access to the capital markets to support its ongoing heavy capital spending. As such, an inability to access additional funds at an appropriate time would have negative rating implications.

WHAT COULD CHANGE THE RATINGS UP/DOWN

In light of the expected continuing weak credit metrics and need for ongoing access to additional funds to support the company's future growth ambitions an upgrade is unlikely in the next two years at least. Beyond that time, strong profit growth, sustained positive free cash flow and a material deleveraging from current levels would be prerequisites for positive rating pressure.

Conversely, a downgrade would be appropriate in the event of a deterioration in the company's liquidity profile, most likely due to an inability to access the capital markets at an appropriate time. Moreover a downgrade would be considered in the event of material execution issues either with respect to Ocado's own retail operations or in the development and deployment of online retail solutions for third-party grocers.

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.

COMPANY PROFILE

Established in 2000, Ocado is the UK's only scale pure-play grocery e-tailer and, with annual Retail revenue of GBP1.6 billion in 2019, it has a 1.5% share of the overall UK grocery market, according to Kantar Worldpanel. Ocado has been listed on the London Stock Exchange since 2010 and currently has a market capitalisation of over GBP8.5 billion.

In addition to its own online grocery operations, the company provides services to other retailers via the Solutions division. WM Morrison Supermarkets plc (Baa2 stable) is the longest-standing Solutions customer, with Ocado operating the morrisons.com website and fulfilling the orders placed on it. Since 2017, Ocado has announced deals to provide solutions to several international retailers, including France's Casino Guichard-Perrachon SA (B2 negative), Sobeys Inc. of Canada and The Kroger Co. (Baa1 stable), the largest traditional supermarket chain in the US.

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.

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

Richard Etheridge
Associate Managing Director
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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