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Alignment Of Interest

29 May 2019 by jbchevrel

Casino Guichard-Perrachon (COFP) is now Ba3 n/Bn after S&P downgraded the credit by 2 notches, after the mother company Rallye (RALFP) started safeguard proceedings. Post that, the 5y CDS is wider by 35bp, after a +60bp delta intra-day. More importantly, the curve flattened aggressively, with 1s5s down by more than -100bp. The DC confirmed a credit event had occurred on Rallye (RALFP) for both docs, in this respect. Debtwire reported that a bank has been trying to sell €100M RALFP secured, suggesting the value attached to the security package (COFP shares) may not be worth as much. S&P said COFP CEO Naouri may not have his interest aligned with COFP creditors’, as he got COFP stocks as collateral of RALFP, he has interest to maximize dividend payments to service RALFP's debt and receive dividends on behalf of RALFP rather than deleverage COFP. The safeguard procedure may be a way for RALFP shareholders to avoid the enforcement of the pledge over their shares in COFP that are collateral for RALFP creditors (banks), keeping their control on COFP. The fact that COFP cancelled its 2019 interim dividend (normally paid Nov) was a slight positive, but was not unexpected, and didn’t prevent the selloff. And COFP has not changed its dividend per share policy, for now, making this look more like a one-off. And as that came just after the downgrade, some other negative developments might be under way.