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Related Issuers
Rating Action:

Moody's upgrades BrightHouse's ratings to B1; outlook stable

15 Sep 2015

London, 15 September 2015 -- Moody's Investors Service has today upgraded the corporate family rating (CFR) of BrightHouse Group PLC ('BrightHouse') to B1 from B2 and the Probability of Default Rating (PDR) to B1-PD from B2-PD. Concurrently, Moody's has upgraded the rating of BrightHouse's GBP220 million senior secured notes due 2018 to B1 from B2. The outlook on all ratings is stable.

RATINGS RATIONALE

The rating action concludes the review of BrightHouse's ratings initiated on 16 June 2015. The review was prompted following the publication on June 15, 2015 of the updated methodology "Financial Statement Adjustments in the Analysis of Non-Financial Corporations"

https://www.moodys.com/research/--PR_327853.

The upgrade reflects primarily the reduction in leverage as a result of the change in lease methodology. It also reflects the improvement in the company's credit metrics since the initial rating assignment in April 2013 due to a strong track record of growth and deleveraging, as a result of its organic growth as well as new store openings. Moody's adjusted leverage at 4.2x LTM June 2015 was significantly below opening leverage of 5.8x for the full financial year ended March 2013 ('FY2013') pro-forma for the refinancing and also below Moody's upgrade trigger of 4.5x. The improvement includes the c. 0.8x impact from a lower lease multiple applied since June 2015. The rating action also assumes that the company's performance will not be significantly negatively affected by the outcome of the ongoing Financial Conduct Authority (FCA) authorisation process.

The B1 CFR reflects (i) BrightHouse's well-established leading position in the UK rent-to-own market supported by over 300 branches over the UK; (ii) fairly unique product offering, notably product rentals over three years with the right to purchase at the end of the contract, differentiating it from most mainstream retailers; (iii) strong historical rent-to-own industry growth supported by limited disposal income of consumers and limited competition from other forms of credit financing which we expect to continue, although at a slower pace as the market matures.

The rating is constrained primarily by (i) the company's small scale in the context of the broader retail market and competition from low cost and online retailers; (ii) regulatory risk arising from the increased scrutiny by the FCA who took over the regulation of the sector from the Office of Fair Trading (OFT) in April 2014; and (iii) credit risk given the company's customer base of low-income households with poor credit history, so far well managed.

Moody's expects BrightHouse's growth prospects to be supported by a resumed new store rollout of around 20 stores a year (including satellite stores), positive LFL growth of existing stores which amounted to 4.7% LTM June 2015 and a roll-out of fully transactional online proposition. The full impact of the online proposition is yet to be assessed as it is likely to result in some cannibalisation of physical stores sales offset by an increase in new customers. Compared to traditional retailers BrightHouse's physical presence in stores seem to be more important given the relatively loyal customer base and the importance of building customer relationships.

BrightHouse, among other companies who wish to continue offering consumer credit, is going through an authorisation process with the FCA. The growth and continuity of BrightHouse's business depend very much on the success of its authorization process and regulatory evolution within the rent-to-own industry. The outcome of the process is uncertain and includes a range of possible consequences, some of which could be negative for BrightHouse's business. On the positive side, BrightHouse has been proactively tackling changes in the regulatory regime by increasing compliance monitoring resources, enhancing transparency of the cost structure of its products, and pursuing its application for the FCA authorization. From April 2015 the company unbundled the cost of insurance from its Single Price Agreement introduced in September 2013. Moody's understands that this change did not have a significant negative impact on the company's performance.

Moody's assesses BrightHouse's liquidity profile as adequate. As of June 2015, the company reported cash on balance sheet of GBP26million (including GBP5 million restricted cash). Liquidity is supported by the fully undrawn GBP25 million Revolving Credit Facility (RCF). The company has no near-term debt liabilities, until the maturity of the RCF in November 2017, while the GBP220 million notes mature in 2018. The RCF contains a financial covenant of net debt-to-EBITDA, falling from 6.8x as of June 2013 to 4.1x as of March 2016 which Moody's expects to be met with a sufficient headroom.

STRUCTURAL CONSIDERATIONS

The capital structure includes GBP220 million senior secured notes and GBP25 million RCF. The GBP220 million senior secured notes due 2018 are issued at BrightHouse Group PLC (UK), which is also the borrower of the RCF. The B1 rating of the notes, at the same level as the CFR, reflects the limited amount of debt ranking ahead. The notes and the RCF share the same security. However, based on the terms of an inter-creditor agreement, while the liens securing the notes will rank equally with the liens that secure the RCF, in the event of enforcement of the collateral, holders of the notes will receive proceeds only after the lenders under the RCF have been repaid in full.

RATING OUTLOOK

The stable outlook on the ratings reflects Moody's expectation that BrightHouse will continue to exhibit strong sales growth supported by positive LFL of the existing stores and new store openings. The stable outlook also assumes that the FCA authorisation will be obtained in due course without a significant negative impact on the business.

WHAT COULD CHANGE THE RATING UP/DOWN

The positive pressure could be exerted if Moody's adjusted leverage declined below 3.5x and EBITA/Interest expense increased above 2.0x.

Conversely, there could be downward pressure if Moody's adjusted leverage were to rise sustainably and substantially towards 4.5x or EBITA/Interest expense declined below 1.5x or if its cash flow generation deteriorated so that RCF / Net debt declined significantly below 10%.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Retail Industry published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

CORPORATE PROFILE

BrightHouse Group PLC, based in Watford, is a leader in the rent-to-own market in the United Kingdom. For the last twelve months ended 30 June 2015, the company reported revenues of GBP358 million, with 303 stores as of 30 June 2015.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Tanya Savkin
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Richard Etheridge
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades BrightHouse's ratings to B1; outlook stable
No Related Data.
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