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Rating Action:

Moody's upgrades Maisons du Monde to B1 from B2; stable outlook

04 May 2016

London, 04 May 2016 -- Moody's Investors Service, ("Moody's") has today upgraded Magnolia (BC) Midco S.a.r.l.'s (Maisons du Monde) corporate family rating (CFR) to B1 from B2 and probability of default rating (PDR) to Ba3-PD from B1-PD. Concurrently, Moody's has upgraded to B1 from B2 the EUR325 million senior secured notes due 2020 issued by Magnolia (BC) S.A., a subsidiary of Maisons du Monde. The rating outlook is stable.

RATINGS RATIONALE

"The rating action reflects (1) Maisons du Monde's significant de-leveraging in fiscal year (FY) 2015 thanks to its strong operating performance, (2) the good growth prospects for the business leading to a further moderate de-leveraging over the medium-term which may be accelerated thanks to a successful capital raising via an initial public offering (IPO), and (3) Moody's assumption that the company will maintain a prudent expansion strategy and maintain an adequate liquidity position", says Sebastien Cieniewski, Moody's lead analyst for Maisons du Monde. Nevertheless, the rating remains constrained by (1) the company's relatively small scale with revenue concentration in France, (2) the high seasonality of sales and profits and the operating risks induced by the positioning of Maisons du Monde's "stylish" product range, and (3) the limited free cash flow (FCF) generation over the medium term.

Moody's positively views the significant improvement in Maisons du Monde's adjusted leverage (as adjusted by Moody's mainly for operating leases) to 4.5x as of FYE 2015 from 5.0x a year earlier. This de-leveraging resulted from the strong operating performance of the company in 2015 when it experienced an 8.7% like-for-like (LfL) increase in customer sales compared to FY2014 or a total 15.7% increase on a reported basis including store openings while maintaining a strong margin. This performance was driven by the strong execution, relatively lower comparables in FY 2014, and the recent acceleration in the growth of the French decoration and furniture market.

Moody's projects further moderate de-leveraging by less than half a turn over the next 18 months supported by continued positive LfL growth driven by (1) a favourable market trend with the French decoration and furniture market expected to grow at 1.5-2.0% over the medium-term, and (2) Maisons du Monde's strong track record of outperforming the market and its relatively higher exposure to online sales (17% of customer sales in 2015), which is the fastest growing distribution channel for the decoration and furniture market.

Moody's notes though that de-leveraging could be accelerated thanks to a successful IPO. On 19 April 2016, Maisons du Monde announced that it filed its registration document with the French stock market authorities as a first step towards the IPO of Maisons du Monde S.A.'s (a subsidiary of Maisons du Monde) shares on Euronext Paris. If successful, the IPO, to be launched before the end of June 2016, will enable the company to raise EUR150 million to EUR180 million of capital. These proceeds alongside new 5-year EUR250 million Senior Credit Facilities, and drawings under a new 5-year EUR75 million revolving credit facility will be used to (1) replace the existing EUR60 million super senior revolving credit facility (RCF), (2) redeem the EUR325 million high yield bonds maturing 2020 with an estimated EUR19.4 million make-whole redemption premium, (3) pay transaction fees, and (4) repay a EUR60.5 million vendor loan. While credit positive, Moody's considers that the IPO will have a relatively marginal impact of 0.3x on the company's pro-forma leverage and will not lead to immediate rating pressure.

Maisons du Monde has an adequate liquidity profile as of FYE 2015 supported by EUR76.4 million of cash on balance sheet and the undrawn EUR60 million RCF. The RCF, which has limited conditionality (see further below), is very important given the company's high seasonality of operations.

Moody's expects FCF to remain limited over the medium-term at 3% to 5% of total adjusted debt due to the company's high capex and working capital needs in order to deliver its store expansion plan. In 2016, FCF should be negative due to the normalization of inventories by the end of the year due to delays in the reception of a portion of the 2016 collection at the end of 2015. The majority of capex projected at between 5-6% of customer sales over the next 2 years, which management expects to reduce to 4.0-4.5% by 2020 will support management's target to open 25 to 30 stores per annum in 2017-2020 with 20 net openings projected by management in 2016. While the store openings will constrain capex, they will contribute to improving the company's geographical diversification - two thirds of these openings will take place outside of France. Pro-forma for the IPO, free cash flow will benefit from significant interest savings resulting from the refinancing of the high yield notes with a 9% annual coupon leading to a reduction in interest paid by c.EUR23 million. However we expect this positive impact to be mostly offset by higher tax and dividend payments equal to 30% to 40% of the consolidated net income to be paid from 2017 on the basis of results of FY 2016.

The B1 rating assigned to senior secured notes, in line with the CFR, reflects their position behind certain operating subsidiaries' non-financial debt, including trade payables, and the EUR60 million RCF. The notes and the RCF benefit from a similar maintenance guarantor package, including upstream guarantees from guarantor subsidiaries. Both instruments are also secured, on a first-priority basis, by certain share pledges, intercompany receivables and bank accounts. However, the notes are contractually subordinated to the RCF with respect to the collateral enforcement proceeds.

The super-senior facility has only one maintenance covenant, which is tested at year-end and only when the RCF is drawn. In our opinion, this is not a very restrictive covenant. Maisons du Monde's probability of default rating (PDR) of Ba3-PD reflects the use of a 35% family recovery assumption, consistent with an all-bond capital structure.

RATIONALE FOR THE STABLE OUTLOOK

The stable rating outlook reflects Moody's expectation that Maisons du Monde will experience continued LfL revenue growth and maintain a disciplined approach to the expansion of its store network while preserving its adequate liquidity position.

WHAT COULD CHANGE THE RATING UP/DOWN

Upwards pressure on the ratings could arise if (1) Maisons du Monde successfully increases its geographical presence outside of France while maintaining its level of profitability, (2) reduces its adjusted debt/EBITDA ratio to below 3.5x and improves its adjusted EBIT/interest expense towards 3.0x, and (3) builds itself a cushion of liquidity limiting its reliance on the RCF.

Conversely, negative pressure could arise if (1) Maisons du Monde's operating performance weakens translated into flat or negative LfL sales growth, (2) adjusted (gross) debt/EBITDA ratio increases towards 5.0x, and (3) the liquidity position deteriorates.

PRINCIPAL METHODOLOGY

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

Maisons du Monde is the ultimate parent company of Maisons du Monde S.A.S. Headquartered in Nantes, France, Maisons du Monde France S.A.S. is a French home decoration and furniture retailer. The Group's product offering is divided into two main categories: decorative products and furniture. Maisons du Monde recorded revenues of EUR723 million in fiscal year ending (FYE) 31 December 2015. The company is predominantly active in France, where it held 193 stores. It also operates in Italy (30 stores), Belgium and Luxembourg (16 stores), Spain (12 stores), Germany (8 stores), which is its second-largest market in terms of internet sales, and Switzerland (3 stores).

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.

Sebastien Cieniewski
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
SUBSCRIBERS: 44 20 7772 5454

Peter Firth
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 Maisons du Monde to B1 from B2; stable outlook
No Related Data.
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