El Corte Ingles, S.A. -- Moody's affirms El Corte Ingles' ratings; outlook changed to stable

Rating Action: Moody's affirms El Corte Ingles' ratings; outlook changed to stableGlobal Credit Research - 26 Jan 2022Paris, January 26, 2022 -- Moody's Investors Service ('Moody's') today affirmed El Corte Ingles, S.A.'s ("ECI", "group" or the "company") Ba1 long-term corporate family rating (CFR), its Ba1-PD probability of default rating (PDR) and its Ba1 guaranteed senior unsecured notes. The outlook has been changed to stable from negative."We have changed ECI's outlook to stable because we expect a strengthening in the company's credit metrics, including leverage, which we expect to be just above 4.0x in fiscal 2021 and to trend below 3.5x in the next 12 to 18 months. Deleveraging is mainly driven by better trading than expected performance and our expectation that the company will repay debt following the EUR1.1 billion proceeds it expects to receive from the company's recent transaction with Mutua Madrilena, a leading Spanish insurance company." said Francesco Bozzano, a Vice President - Senior Analyst at Moody's and lead analyst for El Corte Ingles. "The better than expected operating performance is thanks to lower than expected barriers to shopping related to the pandemic, strong consumer demand and management's successful cost reduction and growth measures implemented in the last 12 months" added Mr. Bozzano.RATINGS RATIONALEThe change in outlook to stable reflects Moody's expectations of deleveraging given ECI's recent commitment to use the majority of the EUR1,105 million proceeds it will receive from the sale of 50.1% of its insurance business and 8% of its shares to Mutua Madrilena (MM) to repay debt. This expectation of debt reduction is a favorable governance development that demonstrates the company's commitment to reducing and sustaining lower leverage than in the past. Additionally, as a new shareholder, MM could strengthen the company's governance by providing additional diversification and oversight to the company's board of directors. Governance was a key driver behind today's rating action and is a consideration under Moody's ESG framework.Deleveraging, combined with the company's ongoing cost rationalization, which accelerated during the pandemic should allow the company to generate sufficient cash flows to invest in the growth of the business, while distributing dividends to its shareholders, leaving the rating strongly positioned at Ba1. With expected positive free cash flows, sufficient covenant headroom and a fully available credit facility we view the company's liquidity as good. ECI also maintains significant financial flexibility thanks to over EUR1 billion non-core real estate assets available for disposal.While the transaction with MM involves the deconsolidation of ECI's insurance business, which generated approximately EUR100 million of EBITDA annually, ECI expects to receive regular dividends from its 49.9% stake in the insurance business, which we will include in Moody's EBITDA.The stable outlook also reflects ECI's recovery with revenues and gross profit in the six months to August 2021 (H1 2021) 25.1% and 35.5% above the figures in the same period in 2020. Topline growth, combined with ongoing cost rationalization resulted in an improvement in EBITDA compared to Moody's previous forecasts. As a result, Moody's expects ECI's leverage will recover to close to 4.0x in fiscal 2021 -- this is before taking into account the MM transaction, which is expected to close in fiscal 2022.In fiscal 2022, Moody's expects that ECI's EBITDA will remain broadly flat pro forma the deconsolidation of the insurance business. The positive effects of ongoing cost rationalization, including the implementation of the Group's voluntary redundancy plan and revenue growth compared to fiscal 2021, will likely be offset by increasing inflationary pressure. Moody's forecasts reflect limited recovery of the company's travel agency's activities and limited traffic linked to tourism, which remain below pre-pandemic levels as travel restrictions are expected to continue. However, Moody's base case does not factor in material additional shopping restrictions in Spain related to the coronavirus pandemic.Beyond fiscal 2022, Moody's expects ECI to remain a key player in the Spanish retail market and a leader in growing Spanish e-commerce, consolidating and growing its position as the second largest e-commerce platform in Spain after Amazon.com, Inc. (A1 stable). Moody's also expects the company will continue to grow its consumer services in insurance, following its alliance with MM, acting as a consolidator in the Spanish travel agency business and providing additional services such as energy and telecom distribution.ECI´s Ba1 CFR remains underpinned by (1) the company´s leading market positions in most of the business segments in which it operates, (2) strong brand awareness and high interest from third-party brands to operate in ECI's stores, (3) a large and unencumbered real estate portfolio with a proven track record of successful asset monetization , (4) and good deleveraging prospects and the firm commitment to maintain a more conservative financial policy with the objective to obtain an investment grade rating.The rating also reflects (1) the company´s high geographic concentration in its home market, (2) the cyclical, seasonal and discretionary nature of its business model, (3) lower profitability margins than rated peers and high earnings dependency on its top ten best-performing stores, (4) and the risks and challenges posed by increasing online penetration rates and competition from pure e-commerce specialists.LIQUIDITY PROFILEMoody's considers the company's liquidity to be good and sufficient to cover working capital seasonality. As of the end of August 2021, the company had a total liquidity of around EUR1.6 billion, comprising cash on balance sheet of around EUR513 million, and EUR1.1 billion available under its revolving credit facility (RCF) maturing in 2024, which can be extended for two years. The company has an upcoming maturity of EUR581 million on its Hipercor bond, which has to be repaid by the end of fiscal 2021, and Moody's expects that the company will use its available cash to repay it.The company has a maintenance covenant on its EUR1.1 billion existing RCF and its ICO loan, which will be triggered only from the end of fiscal 2021 if the company does not have at least two investment-grade ratings. The covenant is set at 4.5x in February 2022, and we expect that the company will have significant headroom under this covenant.STRUCTURAL CONSIDERATIONSThe Ba1 instrument rating on the guaranteed senior unsecured notes is in line with the CFR. The company's probability of default rating of Ba1-PD is also in line with the CFR. The probability of default rating reflects the use of a 50% family recovery rate resulting from a capital structure comprising guaranteed senior unsecured bonds and unsecured bank debt.RATIONALE FOR THE STABLE OUTLOOKThe stable outlook reflects the recovery of the company's performance since fiscal 2020 and Moody's expectation that its operating performance will trend to pre-pandemic levels despite a still uncertain macroeconomic background. Moody's expects leverage will improve leaving the company's credit metrics at least commensurate with the Ba1 rating, including Moody's Adjusted Debt to EBITDA well below 4.0x.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe company is strongly positioned at Ba1. Positive rating pressure could arise if the company maintains a good liquidity buffer supported by at least maintaining its current profitability and free cash flow generation of at least 4% of gross Debt and if its Moody´s adjusted (gross) debt/EBITDA ratio decreases below 3.5x and sustainably towards 3.0x. The maintenance of a prudent financial policy that includes low debt leverage targets and especially a good and proactively-managed liquidity profile on a sustained basis, are key requirements for an upgrade to an investment grade rating.Downward pressure on the ratings could arise as a result of a deterioration in the company's liquidity. Downward pressure could also arise if there is a prolonged period of negative like-for-like sales, weaker profitability and depressed free cash flow generation. On a quantitative basis, the ratings could be downgraded if Moody´s adjusted (gross) debt/EBITDA ratio is maintained above 4.0x.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Retail published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1296095. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEECI, headquartered in Madrid, Spain, is the largest department store in Europe, with groupwide net sales of almost EUR10.4 billion and adjusted negative EBITDA of EUR0.4billion in the fiscal year ended 28 February 2021 (fiscal 2020). The company operates under two divisions, retail and non-retail, which represented around 95% and 5% for both sales and EBITDA, respectively, in fiscal 2020.Founded in 1935 by Ramon Areces, ECI remains privately owned and controlled by the founder's descendants. Its current main shareholders are the Ramon Areces Foundation, Cartera de Valores IASA and PrimeFin, S.A.REGULATORY 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. 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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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. 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