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Impairment Bites

10 April 2019 by jbchevrel

HEMA (short for 4 unpronounceable Dutch words) is a Dutch discount retailer operating in Western Europe. Today the 5y CDS of HEMA BondCo I B.V. (HEMABV) widened by c74bp, thus underperforming any constituent of iTraxx XOver (-3.25) but TCGLN (+76). HEMABV CDS was wider by more than 100bp at some point this AM, and bonds were down -7pts (low print at 89.5) but then CDS reverted to +74 and cash closed -3pts on seniors. The retailer reported an impairment of goodwill of €226M, on the occasion of its Q4-18 results release. That led to a net loss for the year 2018 of €233M. Without that it would have been a ‘nothing year’ at €7M net profit. Net sales were still up +3% and revenue was up +8.5%, but adjusted EBITDA was hammered -18% to +€39M. This was driven by two things mainly. Firstly, excess stock had to be cleared, incurring markdowns in Q4, and secondly, higher labour costs and rent costs (up by +4% and +11% respectively in the period). I don’t expect to former to be a macro risk in Europe, but it is often mentioned by economists as a potential risk to US corporate margins. In 2018, the balance sheet of HEMABV saw a decent cash burn (at the company scale), from €67M to €29M. Guidance was positive (positive LFL Q1 in BE/LU/FR) but not much clarity on future deleveraging for credit people did not help. If OpEx keep rising, and the pace of cash decreased sustains in the next few quarters, we may well see diverging spreads. Elsewhere in European HY, the firm tone continued today (XO -3.25), quite immune to slight macro weakness (Bund -2bp confirming negative territory & Stoxx reverting -0.3% in the afternoon), a bit similar to Friday in that respect.