Rating Action: Moody's upgrades Isabel Marant's CFR to B2; Outlook stableGlobal Credit Research - 26 Jan 2022Paris, January 26, 2022 -- Moody's Investors Service ("Moody's") has today upgraded IM Group SAS's ("IM" or "Isabel Marant") corporate family rating (CFR) to B2 from B3. Concurrently the rating agency upgraded IM's probability of default rating (PDR) to B1-PD from B2-PD. Moody's also upgraded to B2 from B3 the rating assigned to the senior secured notes due 2025 issued by IM Group SAS, the owner of French luxury apparel brand Isabel Marant. The outlook changed to stable from positive."The upgrade reflects Isabel Marant's very good operational performance in 2021, and the company's strong credit metrics, which have already recovered to above pre-pandemic levels" says Guillaume Leglise, a Moody's Vice-President Senior Analyst and lead analyst for Isabel Marant. "The company already has a solid wholesale order pipeline for 2022, which should continue to support earnings growth and deleveraging towards 4.0x over the next 18 months" adds Mr Leglise.RATINGS RATIONALEToday's rating action is primarily driven by IM's strong recovery in its key credit metrics in 2021. At end-September 2021, Moody's estimates the company's leverage (Moody's-adjusted debt/EBITDA) reduced to around 5.2x, compared to 8.0x in 2020, despite the additional debt raised during the pandemic. This deleveraging reflects the company's strong operating performance, with sales and EBITDA above pre-crisis levels. Moody's expects that IM's key credit metrics will continue to strengthen over the next 18 months, driven by (1) the solid wholesale orders already booked for 2022, currently at their highest level ever, and (2) the additional contribution from the company's new store openings, including the 16 retail stores opened in 2021 and another 7 expected for 2022. Moody's expects the company's leverage to trend towards 4.0x in the next 12 months, which would position IM strongly in the B2 rating category.IM's B2 CFR reflects its (i) balanced distribution channels and geographically diversified footprint; (ii) asset-light business model because of the predominance of wholesale operations, which provide good revenue visibility; (iii) solid profitability compared to apparel peers and solid performance during the coronavirus pandemic; (iv) good earnings growth prospects because of its retail expansion strategy and growing luxury fashion industry; and (v) good free cash flow (FCF) generation and adequate liquidity.At the same time, IM's rating is constrained by (i) the company's exposure to high fashion risk in the fast-moving and competitive luxury fashion segment; (ii) its limited scale and relatively narrow brand focus; (iii) some key person risk considerations stemming from a high reliance on the company's founder and main designer, Ms Isabelle Marant; and (iv) the ongoing supply chain challenges and inflationary environment which may constrain margins in the next 12-18 months.IM's liquidity is adequate. On 30 September 2021, the company had E71.7 million of cash. Moody's expects IM's FCF to amount to around E25 million in 2021 and to range between E20 and E35 million thereafter, despite higher capital expenditures and working capital needs related to new store openings. The company does not have any significant debt maturities, until the senior secured notes mature in March 2025. The E30 million State-guaranteed loans will gradually amortise till May 2026 (c. E6 million per year).STRUCTURAL CONSIDERATIONSAs of 30 September 2021, IM's capital structure comprised senior secured notes of E200 million (E192 million outstanding), two state-guaranteed loans for a total of E28 million, and a E3.5 million loan with Bpifrance (Aa2 stable). The senior secured notes benefit -- on a first-priority basis -- from a security package, including certain share pledges, intercompany receivables and bank accounts.The B2 rating assigned to IM's senior secured notes is in line with the CFR. The probability of default rating (PDR) of B1-PD reflects the use of a 35% family recovery assumption, consistent with a bond capital structure and no financial covenants.RATIONALE FOR THE STABLE OUTLOOKThe stable outlook reflects Moody's view that IM's sales and earnings will continue to improve over the next two years, owing to a solid wholesale order pipeline and a growing contribution from directly operated stores and online. The stable outlook also incorporates Moody's expectations that IM will generate positive FCFs and maintain an adequate liquidity profile over the next 18 months.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward rating pressure could arise if IM continues to execute on its strategy of new store openings while delivering sustained growth in sales and earnings. An upgrade would also require IM to gain scale and product line diversification, generate positive FCF, reduce leverage (as adjusted by Moody's) materially below 4.0x and achieve adjusted EBITA/interest expense above 2.5x. An upgrade would require the company to have good liquidity and demonstrate a balanced financial policy.Conversely, negative rating pressure could arise if there is evidence that IM's sales and earnings are facing operational pressures or a decline in operating margins. Quantitatively, an adjusted debt/EBITDA ratio rising towards 5.5x could trigger a downgrade or if liquidity deteriorates because of negative FCF for an extended period of time.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Apparel published in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276303. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEHeadquartered in Paris, France, IM Group SAS is a holding company, owner of Isabel Marant, a French luxury apparel company, designing and distributing women ready-to-wear products (dress, T-shirts, bags, shoes) and accessories (belts, jewelry). Founded by Ms Isabelle Marant in 1994, the company's products are offered through two main lines, Isabel Marant (58% of revenues), "Isabel Marant Etoile" (42% of revenues). IM is part of the Federation Française de la Mode and takes part of shows during the Paris Fashion Week since 1994. In the 12 months to 30 September 2021, the company reported E205 million of revenue and E69.5 million of EBITDA (as reported by the company).IM is ultimately 51% owned by the French private equity company Montefiore Investment SAS since 2016, while the remaining 49% is owned by the company's founders and managers.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. 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