Rating Action: Moody's assigns B2 CFR to Euro Ethnic Foods, outlook stable
Global Credit Research - 14 Jan 2021
Paris, January 14, 2021 -- Moody's Investors Service ("Moody's") has today assigned a B2 corporate family rating (CFR) to Electra Bidco ("Euro Ethnic Foods" or "EEF" or the "Company") and a B2-PD probability of default rating (PDR). Concurrently, Moody's assigned a B1 rating to the EUR465 million senior secured 1st lien term loan B and a B1 rating to the EUR50 million senior secured revolving credit facility (RCF) to be raised by EEF. The outlook assigned is stable.
On 20 November 2020, PAI Partners, a European private equity company, announced the acquisition of a majority stake into Euro Ethnic Foods, a French food retailer specialising in high quality grocery and beverage products. Moody's expects that the acquisition will be completed in the first quarter of 2021.
The B2 CFR reflects EEF's earnings growth on the back of robust like-for-like sale growth rates and store openings; its presence within the Grand Frais fresh food store, which grows faster than the traditional French grocery market due to growing customer preferences for fresh and healthy products; its positive free cash flow generation; its high profitability, with a Moody's-adjusted EBITDA margin of around 22% in fiscal 2020 (ending on 30 September); and its focus on high quality healthy and international products, which differentiates the company from its competitors.
Still, the company's rating is constrained by its high leverage, with a Moody's-adjusted (gross) debt/EBITDA of around 6.7x in the last twelve months to November 2020 and pro forma the transaction; its small size relative to traditional grocers and relative to Grand Frais, which could limit its pricing power; its dependence on the success of the fruits and vegetable business, which is one of the other draws for customers to Grand Frais; the concentration of its earnings in France, which accounts for all the company's EBITDA; and the lack of direct control over certain strategic decisions such as real estate development, which is managed by a different entity. This entity is, however, currently controlled by the Bahadourian family, which retains a 40% stake in EEF and EEF can in any case decide whether to participate to new store expansion independently from its partners.
EEF has a solid track record of sales growth driven by like-for-like growth and new store openings. In fiscal 2020 EEF, like other grocers, also benefited from lockdown measures, travel restrictions and social distancing measures which prevented customers from eating outside of their homes. All these factors led to a revenue growth of around 15% and an EBITDA growth of around 26% during the fiscal year. For fiscal 2021, Moody's expects a strong performance in the first half of the year, boosted by store openings and by ongoing restrictions to eating out. Moody's expects this strong performance in H1 to be partially offset in the second half of the year due to reduced restrictions related to eating out, an uncertain macroeconomic backdrop, and intense competition. Moody's still expects EEF revenues to grow by around 10% in fiscal 2021 driven by around 20 new store openings. Moody's recognises that EEF has already opened 6 new stores in YTD fiscal 2021 and that 16 are currently under construction.
Moody's expects leverage to trend towards 6.0x in the next 12 to 18 months driven by continued EBITDA growth from store openings and positive like-for-like (LFL) sales.
EEF's liquidity is adequate, because of a EUR50 million undrawn RCF, and the expectation of around EUR7 million cash on balance sheet, which Moody's expects should cover short-term working capital needs. Seasonal swings in revenues and working capital could lead to temporary drawings on the RCF.
Seasonal variations in working capital are substantial, with a cash outflow during the 1st and 2nd quarter (Oct-Dec and Jan-Mar) and an inflow in the third and fourth quarter. There is some, albeit limited, seasonality in the topline with revenues peaking in the March-June period due to major events of the year such as Easter Holidays and Ramadan.
Thanks to its high margins, Moody's expects EEF to maintain interest cover around 3.0x and to generate positive free cash flows of around EUR 20 million per year in the next 12 to 18 months. Moody's expects capex excluding lease repayments at around 4% of revenues and mid-single digit negative working capital movements.
The RCF will be subject to a springing covenant to be set with a 40% headroom against opening leverage. The company doesn't have any short term maturities and the first maturity is in 2028 when the TLB becomes due.
The EUR465 million senior secured Term Loan B issued by EEF and the EUR50 million senior secured revolving credit facility to be issued by EEF are rated B1, one notch above the CFR reflecting their more senior ranking in the waterfall and the buffer provided by the EUR75 million second lien instrument. It also reflects the presence of upstream guarantees from material subsidiaries of the group.
The B2-PD Probability of Default Rating, in line with the CFR, reflects the hypothetical recovery rate of 50%, which Moody's believe is appropriate for a capital structure comprising bank debt and with a single springing covenant under the RCF with significant headroom.
The stable outlook reflects Moody's expectation that EEF will deleverage towards 6.0x Moody's-adjusted (gross) debt/EBITDA in the next 12 to 18 months by continuing to grow its revenues and EBITDA.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the ratings could arise in case of a sustained decline of the Moody's-adjusted (gross) debt/EBITDA ratio comfortably below 5.5x, a significant rise in Moody's-adjusted free cash flows as well as a track record of prudent financial policy, with no dividends and no debt-funded acquisitions. A positive rating action would also necessitate a continued increase in penetration rate, well above 60%, among Grand Frais customers.
Downward pressure on the ratings could arise if Moody's-adjusted (gross) debt/EBITDA is sustainably above 6.5x, for instance because of a downturn of the fresh food market. A deterioration of the company's liquidity profile, as shown for example by an inability to generate positive Moody's-adjusted free cash flow, could also prompt a negative rating action. Moody's could also consider downgrading the rating in case of material underperformance of Grand Frais' partners, particularly the fruits and vegetable business, if this could lead to a disruption in footfall in Grand Frais stores.
The 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.
Headquartered in Lyon, France, EEF is a member of the Grand Frais brand, a store network focused on fresh quality products. Each Grand Frais store is around 1,000 square meters large and sells five different types of products: grocery products, which are managed by EEF, fruit and vegetable, fish, meat and dairy products which are managed by third party companies. EEF represents 25% of the Grand Frais governance and the remainder is split between three private companies: Despinasse controlling 25% and Prosol Gestion and Cremerie Exploitation, both controlled by private equity fund Ardian, representing 50% of Grand Frais.
EEF generated EUR435 million of revenue in fiscal 2020 with 236 stores as of 30 September 2020.
EEF is owned by PAI partners, a private equity group. EEF was founded in 1929 by the Bahadourian family, who remain minority shareholders through their company called Norkorz Capital. The management team is led by Christelle Le Hir, the CEO, who has been in this role for the last ten years. Following the contemplated sale of EEF, Norkorz Capital will retain a minority interest.
For 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.
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