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04 May 2017
London, 04 May 2017 -- Moody's Investors Service has today upgraded French apparel retailer SMCP
Group's ("the company" or "SMCP") corporate
family rating (CFR) to B1 from B2, and probability of default rating
(PDR) to B1-PD from B2-PD. Concurrently, Moody's
has also upgraded to B1 from B2 the EUR471 million worth of senior secured
notes (EUR100 million floating rates notes due 2022 and EUR371 million
fixed rates notes due 2023). The outlook on the ratings has been
changed to stable from positive.
"The upgrade reflects SMCP's continued robust organic growth and
profitability which have translated into stronger leverage and coverage
metrics", says Guillaume Léglise, a Moody's analyst
for SMCP. "We expect SMCP will maintain a solid earnings
momentum and a positive free cash flow generation in the next 12 to 18
months, supported by the company's successful brands recognition
and strategy to open new stores abroad, notably in Asia",
adds Mr Léglise.
SMCP's B1 CFR reflects the (1) good brand recognition of SMCP brands;
(2) solid sales growth recorded in recent years, underpinned by
positive like-for-like (LFL) sales data in all geographies
and under all brands; and (3) solid profitability, which has
increased significantly in 2015-16 despite a challenging market
environment in France, its home market which accounts for 46%
of net sales.
Thanks to its solid operating performance, SMCP has reduced its
leverage since the bond refinancing completed in May 2016. Moody's
estimates SMCP's gross leverage (defined as Moody's-adjusted
debt to EBITDA) stood at around 4.1x as at end-December
2016, compared to 4.9x in FY2015 (proforma for the May-2016
bond refinancing). The redemption of EUR37 million of the senior
secured notes completed in April 2017 will also marginally support deleveraging
in 2017. In view of the recent trends in the company's revenues
supported by new store openings mainly in Europe (ex-France) and
Asia and its stable margins, the rating agency expects continued
solid profitability growth, as proven historically by SMCP,
which will support further deleveraging in the next 12 to 18 months.
In addition, Moody's expects SMCP will maintain a good liquidity
position, which as of 31 December 2016, comprised cash on
balance sheet amounting to EUR56 million and access to an undrawn EUR70
million covenanted revolving credit facility (RCF), expiring in
2022 (unrated). SMCP can also rely on confirmed overdraft facilities
totaling approximately EUR40 million (unrated). The RCF is subject
to a consolidated net debt to EBITDA financial covenant under which headroom
is significant, and which is tested only if the facility is drawn
by more than 25%.
However, the B1 rating is constrained by (1) SMCP's modest scale
compared to other diversified global players rated by Moody's,
its limited number of brands and its earnings concentration on the French
market, albeit mitigated by an increasing international presence
(international market accounted for 54% of the group sales in 2016,
compared to 28% in 2012); (2) SMCP's exposure to fashion risk;
and (3) the highly fragmented and competitive nature of the apparel sector
in the markets where the company operates. In addition, the
rating agency cautions that SMCP's fast-paced expansion strategy,
particularly in new markets, creates execution risks and results
in sustained high capex which has historically constrained free cash flow
generation. Moody's nevertheless expects capex spending to
remain contained to around 5% of net sales, as seen in 2016,
which will support a positive free cash flow generation in the next 12
to 18 months.
In addition, SMCP's ratings are constrained by the weaker credit
quality of its Chinese majority shareholder, textile manufacturer
Shandong Ruyi Technology Group Co., Ltd. ("Ruyi",
B2 stable) on a standalone basis. Moody's notes that in 2016 and
on a proforma basis, SMCP generated over 15% of the consolidated
revenues and around 30% of the consolidated reported EBITDA of
Ruyi. As such, Moody's believes that SMCP is of strategic
importance to its owner and that there is some uncertainty with regards
to SMCP's financial policy and any potential need to support its parent
going forward. As a result, Moody's considers SMCP's rating
to be limited at a maximum of one notch above that of Ruyi, which
is currently rated B2 with a stable outlook.
Nonetheless, given SMCP's strong operating performance and cash
generation ability, Moody's considers indebtedness located at the
level of SMCP to be structurally senior to the debt issued by Ruyi,
which, on a standalone basis, is weaker. In addition,
covenants in the bond indenture limit the company's ability to make certain
payments, including dividends. Any dividend would be permitted
following the satisfaction of a gross leverage ratio test, set at
2.5x (currently at 3.5x). Whilst the company is unable
to satisfy this ratio, it will have access to the accumulating credit
under the RP income basket plus carve-outs.
The B1 rating on SMCP's EUR471 million senior secured notes, the
same as the CFR, reflects the fact that the notes are the largest
single component of the rated group's financial and non-financial
debt. The super senior RCF is the only other debt obligation of
the group. The notes and the revolver are both guaranteed by certain
group holding and operating companies, and benefit, on a first-priority
basis, from certain share pledges. However, under the
terms of an inter-creditor agreement the RCF ranks ahead of the
senior secured notes upon enforcement. Moody's assessment factors
in significant limitations on the enforcement of the guarantees and collateral
under French law which mean that in practice non-debt obligations
of operating subsidiaries, including trade payables and operating
lease commitments, could rank ahead of the issuer's debt.
The PDR of B1-PD reflects the use of a 50% family recovery
assumption, consistent with a capital structure including a mix
of bond and bank debt. The capital structure has limited covenants
overall with the lenders relying only on incurrence covenants contained
in the senior secured notes indentures as well as one maintenance covenant
defined as net leverage, with ample headroom as of today.
This covenant is only tested if outstanding borrowings under the super
senior RCF are equal to or greater than 25% of the overall commitment.
The stable outlook reflects Moody's view that SMCP will deliver
continued growth in earnings driven by its international expansion strategy,
notably in Asia. Moody's expects this will support a positive
free cash flow generation and further deleveraging in the next 18 months.
The rating agency also assumes the company will maintain a good liquidity
profile including continued access to its revolving credit facility,
and strong headroom under applicable financial covenant.
WHAT COULD CHANGE THE RATING UP/DOWN
An upgrade is unlikely in the near term in light of today's upgrade.
Moreover, the lower rating assigned to SMCP's parent Ruyi (B2 stable)
constrains SMCP's rating at the current level.
Moody's could consider upgrading SMCP's ratings if the company continues
its recent trajectory of profitable growth, maintains above rated
peers like-for-like sales growth and generates a positive
free cash flow leading to improved credit metrics such as Moody's-adjusted
(gross) debt/EBITDA ratio sustainably below 3.5x and Moody's-adjusted
EBIT/Interest Expense ratio above 2.5x. An upgrade would
also be dependent upon confirmation of an intention to pursue a prudent
financial policy without material acquisition or distribution to shareholders.
Conversely, SMCP's ratings could be under downward pressure
if there is evidence of a weakness in like-for-like sales
growth as a result of, for example, poor execution or deterioration
in either profitability or free cash flow generation. Quantitatively,
a Moody's-adjusted debt/EBITDA ratio approaching 4.5x
and a Moody's-adjusted EBIT/Interest Expense ratio trending
towards 1.5x could trigger a downgrade.
Furthermore, Moody's cautions that a downgrade of Ruyi's CFR could
weigh on SMCP's ratings or outlook especially if there is evidence that
Ruyi's weaker credit quality could cause a change in SMCP's financial
policy including dividend payments.
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.
Headquartered in Paris, SMCP is an apparel retailer focused on the
accessible luxury segment (average item selling price is c.EUR215)
through three brands: Sandro, Maje, and Claudie Pierlot.
In the fiscal year ended 31 December 2016 SMCP recorded net sales (before
deducting concession fees) of EUR786 million and reported an EBITDA of
EUR130 million. In May 2016, a bond financing was launched
in support of the transaction under which Chinese textile manufacturer
Shandong Ruyi Technology Group Co., Ltd. (B2 stable)
became the majority owner of SMCP (81% of the share capital).
Former majority owner, private equity firm KKR, and the company's
management retained minority stakes.
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