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Good Grades Matter

25 March 2019 by jbchevrel

Auchan Holding (AUCHAN) is the worst-performing CDS in iTraxx Main today, wider +10bp, after the S&P announcement on Friday that they revised its outlook to negative. That makes the French retailer on the brink of high-yield, as they are now rated BBB-n at S&P. Causes for the change included 1/ Higher leverage (4.5x key level breached) 2/ Weak competitive position in main markets (i.e. France, Italy & Russia) 3/ Transformation plan is taking longer than initially thought… 4/ … and is causing bigger than expected restructuring costs. While leverage currently stands at 4.5x (as of FY18, mainly due to high capex), S&P still expects it to improve to the 3.6x-3.7x area, by the end of the year. Achieving this therefore seems key for Auchan to keep its IG rating, and S&P explicitly said that if their EBITDA margin doesn’t stabilize above 4% in FY19 (for reference, it was 3.9% in FY18), the firm could become HY, unless that is mitigated by other credit positives. Potential credit positives could include a/ asset disposals b/ capex reduction c/ further dividend suspension. It seemingly didn’t come as a surprise for many, as FY18 results had confirmed a weak trading performance with negative LFL growth and a -16% decline in EBITDA, largely due to a still intense price competition. Similarly, a potential downgrade this year would possibly not come as a surprise to some, but would most likely be followed by a material widening in spreads. Similarly, but at a higher level in the rating scale, Carrefour (CAFP, BBBs / Baa1n / BBB+s) was downgraded by S&P despite transformation plan progress, due to high competition and further restructuring costs. Contrary to Auchan’s case, S&P sees CAFP’s EBITDA margin returning to 5% in a 2y horizon.