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EG Group Limited -- Moody's assigns B3 rating to EG Group's proposed new senior secured notes

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Rating Action: Moody's assigns B3 rating to EG Group's proposed new senior secured notesGlobal Credit Research - 01 Mar 2021London, 01 March 2021 -- Moody's Investors Service, ("Moody's") has today assigned a B3 rating to the senior secured debt of $1.4 billion (USD equivalent) due March 2026 split between senior secured notes issued by EG Global Finance plc and a term loan B issued by EG America LLC. All issuers are fully-owned subsidiaries of EG Group Limited (EG or the company). Concurrently, Moody's has assigned a Caa2 rating to the proposed second lien debt of $400 million (USD equivalent) issued by EG Finco Limited. The company's existing ratings, comprising its B3 corporate family rating (CFR), B3-PD probability of default rating, B3 and Caa2 ratings on EG's first and second lien instrument ratings are unaffected by the new issuance. The outlook on the ratings remains stable.The issuance is intended to fund the acquisition of the forecourt business from ASDA (Bellis Finco PLC, Ba2 stable) for an enterprise value of GBP750 million ($1,024 million) as well as forecourt business of OMV AG (A3 negative) in Germany for a consideration of E485 million ($582 million). The new debt will also refinance an existing bilateral bridge facility of $188 million related to a previous acquisition. Both acquisitions are subject to customary regulatory clearances.RATINGS RATIONALEThe B3 CFR reflects Moody's view of the company's: 1) until recently, lack of independent directors despite its much increased size following several large acquisitions completed during the last two years; 2) a gap between audited reported debt metrics and pro-forma debt metrics including the annualised contributions from the acquired businesses and the full year impact of cost savings initiatives already actioned albeit acknowledging that this gap is expected to be at the lowest level ever in Q4 2020; 3) risk of additional and debt-funded M&A activity; and 4) still elevated leverage, albeit reducing.More positively, the rating also reflects the company's 1) wide geographic diversity and increased scale, with strong bargaining power with suppliers and opportunities to employ best practices group-wide; 2) exposure to the growing convenience grocery segment and historically (before the lockdowns) stable fuel demand patterns; 3) a good track record in the integration of recent acquisitions; and 4) its resilient performance during the lockdown months both in terms of EBITDA, cash generation and liquidity profile.Proforma for the acquisition, leverage measured in terms of Moody's adjusted gross debt to Moody's adjusted EBITDA, including the synergies already achieved (i.e. "actioned" synergies) from previous transactions currently being integrated into the group operations, but not including any synergies expected from the acquisitions, will increase to around 7.4x from 7.1x in 2020 based on the company's preliminary results. EG's operations continue to perform well despite the second wave of the pandemic impacting on the group operations during Q4. The majority of its convenience stores and petrol stations remained open during the lockdowns, with recent trading showing year-on-year revenue growth in most countries.More positively, the acquisitions will improve EG's competitive position in the UK and Germany. The company has also made further progress in terms of governance, having announced the appointment of Dame Alison Carnwath as a nonexecutive Director and as Chair of the Audit Committee.The ASDA forecourt business, including petrol filling stations, car washes and ancillary land, currently generate EBITDA of around GBP66 million ($87 million) before the impact of IFRS 16. The acquisition will almost double the number of sites EG owns in the UK to 720, making it the second largest independent operator in the country based on number of sites, and combined EBITDA of $445 million. The acquired operations in Germany generate EBITDA of E55 million ($63 million) pre IFRS 16 and will bring the number of sites EG owns in the country to 1,242 and combined EBITDA of $239 million. EG plans to bring its branded foodservice partnerships, convenience operational know-how and strong fuel purchasing power to drive significant outperformance and synergies, while rolling out ASDA's convenience banner across EG's UK operations. Total synergies expected from these transactions are around $123 million, mostly from the integration of the ASDA assets. Although Moody's does not include unactioned synergies in its leverage calculation given the inherent execution risks involved, the rating agency acknowledges EG's strong record in achieving these synergies in previous acquisitions, and expects them to be largely recognised in the group's audited reported figures when these will be available. Both acquisitions are subject to customary regulatory clearances.EG's operations continue to perform well despite the second wave of the pandemic impacting on the group operations during Q4. The majority of its convenience stores and petrol stations remained open during the lockdowns, with recent trading showing year-on-year revenue growth in most countries. Leverage, calculated proforma and including actioned synergies related to previous acquisitions, stood at 7.1x at the end of 2020, up from 6.7x in Q3 2020 and compared to 7.5x in 2019. Moody's understands that half of this increase in leverage during the last quarter is related to foreign exchange volatility. Although fuel volumes reduced drastically during the first lockdown months (with peaks between 30% and 85%, depending on the country), they have recovered rapidly ending up at 85% of previous year's levels for the full year on a like for like basis. Strong fuel margins continue to largely offset the lower volumes sold; although they have softened recently, fuel margins remain significantly above the two-year average. The group's food service operations have been the most affected during the pandemic, despite a strong performance in both Q3 following a period in which they were temporarily closed during the first wave of the pandemic.In terms of the new board appointment, Carnwath has held several board roles at large UK listed and unlisted companies, and currently holds positions at Zurich Insurance (Zurich Insurance Company Ltd, Aa3 stable), BASF (SE) (A3 stable), and PACCAR Inc ((P)A1 stable). Her appointment follows the recent appointments of Lord Stuart Rose as Chairman, and John Carey as a nonexecutive director. Moody's expects the new appointments will provide their contribution and independent views on the running of the business, governance and boardroom best practice over the next several quarters. EG also announced that it intends to establish remuneration and nomination subcommittees.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSIn terms of governance, EG references the Wates Corporate Governance Principles for Large Private Companies. The Wates principles suggest that the size a board should be guided by the scale and complexity of the company and that companies should consider the value of appointing independent non-executive directors, including a chairman. EG has made significant progress in the last few months, having appointed a chairman and two additional nonexecutive directors to its board, including one as a Chair of its Audit Committee. Moody's expects the new appointments will provide their contribution and independent views on the running of the business, governance and boardroom best practice over the next several quarters. EG also announced that it intends to establish remuneration and nomination subcommittees.Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.LIQUIDITYEG's liquidity position remains adequate, with cash on balance sheet of $692 million and available revolving credit facilities of $592 million at 31 December 2020 including the positive effect on liquidity of deferred excise taxes of $626 million, of which $514 million will be repaid over a 36 months period from July 2021. The revolving facilities have one springing maintenance covenant based on net senior secured leverage, tested only when the facility is drawn by more than 40%.STRUCTURAL CONSIDERATIONSThe B3 rating of the senior secured debt, in line with the CFR, reflects the fact that it represents the majority of debt in the capital structure. The relatively small second lien debt is rated Caa2, reflecting its position behind the first lien facilities in the event of a default. The new notes will be issued by EG Global Finance plc, and guaranteed by the ultimate parent and l of the group EG Group Limited, in line with the majority of the company's senior secured debt.OUTLOOKThe stable outlook reflects Moody's expectations that 1) the opinion of new auditors appointed by the company will not materially differ from the unqualified opinions of the previous auditors, 2) the company will continue to implement planned changes in its governance by appointing non-executive directors to its board, 3) its key debt metrics will continue to gradually improve from current levels while liquidity remains adequate, and 4) no further major acquisitions are made.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if the company improves its governance with regards to internal controls and board composition as expected for a company of the scale and complexity, and at the same time its key debt metrics also improve, as evidenced by Moody's adjusted gross debt to EBITDA (leverage) sustained below 6.5x, with no meaningful gap between reported and pro-forma leverage. Additionally, adequate liquidity needs to be maintained at all times.The ratings could be downgraded if no improvements in governance and internal controls materialise, or the gap between audited reported and pro-forma leverage does not reduce from current levels. A downgrade could also result if leverage increased sustainably above 7.5x, in case of further significant debt-funded acquisitions, or if liquidity deteriorates.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEEG Group is a global retailer operating petrol stations, convenience stores and foodservice outlets in the UK, Europe, the United States and Australia. The group was created through the merger of Euro Garages and EFR Group in 2016. The business has grown through a series of acquisitions to become one of the leading independent motor-fuel forecourt operators in Europe, the US and Australia. The group is headquartered in Blackburn, England and is owned equally by funds managed by TDR Capital LLP and the two brothers who founded Euro Garages, Mohsin & Zuber Issa.Assignments:..Issuer: EG America LLC....Senior Secured Bank Credit Facility, Assigned B3..Issuer: EG Finco Limited....Senior Secured Bank Credit Facility, Assigned Caa2..Issuer: EG Global Finance plc.....Senior Secured Regular Bond/Debenture , Assigned B3REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.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.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.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. Roberto Pozzi Senior Vice President 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. 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