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Cash Strain

03 April 2019 by jbchevrel

Casino Guichard-Perrachon (COFP) saw its CDS widen by c30bp today, the sharpest move since last August, against a rather solid backdrop in Euro HY space (iTraxx Xover is tighter -6bp). The French retailer was downgraded by Moody's yesterday night, by 2 notches from Ba1n to Ba3n and leaves the outlook at negative. That means COFP is now Ba3n/BBn. This development comes in light of COFP’s weak FCF, limiting its ability to reduce gross debt despite large asset disposals. Moody’s sees COFP’s adjusted leverage at 7.5x vs 6.7x as of Q417. The change is also due to RALFP (+55bp) weak liquidity and persistently high leverage, which adds uncertainty on COFP’s future financial policy. Unless RALFP extends the maturity of its bank debt or obtains new sources of funding, it could run short of cash next year, according to Moody’s. In reaction, COFP stated that Moody’s analysis does not take into account COFP’s disposal plan or future reduction in bond debt. This should be nuanced as Moody’s acknowledged positively COFP’s additional €1B disposal plan. And this is why sell-side analysts (incl. Bernstein) seem to largely embrace Moody’s analysis. They repeat the point that asset sales are a short-term fix which does not solve structurally weak cash generation. A risk now is to see S&P follow Moody’s, increasing the risk of COFP falling into single-B. In cash space, the move was broadly consistent with CDS, spreads coming up c30bp across the belly of the curve, leaving the basis still slightly positive. Stocks also fell (-3%). This is contrasting with UK retailers’ performance, as better Brexit sentiment and stronger Kantar data took TSCOLN -4bp SBRY -9bp. Indeed, UK supermarket sales rose 1.4% for the 12 weeks to Mar 24.