TEXT-S&P cuts Metro AG ratings
(The following statement was released by the rating agency)
-- We believe that Germany-based retailer Metro AG's
profitability will continue to weaken as indicated by the company's 2012 EBIT revision to EUR2 billion from almost EUR2.4 billion. In our view, Metro's global diversification fails to compensate for operating underperformance in some of its European markets.
-- We are lowering our long-term corporate credit rating on Metro to 'BBB-' from 'BBB'. At the same time, we lowered our short-term corporate credit rating to 'A-3' from 'A-2'. The outlook is stable.
-- The rating downgrade reflects our assessment that Metro's business risk profile has deteriorated to "satisfactory" from "strong".
-- The stable outlook reflects our view that the company has sufficient financial flexibility to maintain its financial risk profile in line with credit ratios, which we believe are commensurate with the rating.
Rating Action On Oct. 11, 2012, Standard & Poor's Ratings Services revised its long-term corporate credit rating on German retailer Metro AG to 'BBB-' from 'BBB'. At the same time, we lowered our short-term corporate credit rating on the company to 'A-3' from 'A-2'. The outlook is stable.
The downgrade reflects a continuing trend of lower-than-expected profitability. Metro revised its 2012 EBIT guidance before special items by more than 15% to around EUR2.0 billion from about EUR2.4 billion, which Metro AG achieved in 2011 and 2010. We believe that cost savings from the company's "Shape2012" efficiency program, which should have unfolded this year, have been fully depleted as a result of intense competition and challenging macroeconomic conditions in some of its European countries. In the first six months of 2012 the company's EBIT before special items was 30% below last year's numbers; the fourth quarter however is traditionally the crucial quarter for Metro's profitability (about 60% of annual EBIT).
We have revised our assessment of Metro's business risk profile to "satisfactory" from "strong" based on our view that the MediaMarkt-Saturn (MMS) business will continue to be hurt by price competition from online retailers and that MMS' historic profitability levels will not be achievable going forward. Furthermore, we believe that lower in-store sales will transform the Cash & Carry (C&C) business and that it will remain difficult for Metro to run the C&C business profitably in some major countries. This was evidenced by Metro's exit from the U.K. and its unsuccessful efforts to turn the German C&C business around to date. In addition, we believe that the Russian, North European, and Asian businesses, where Metro generates about 60% of its sales, will not compensate for difficult trading conditions in some of its South and East European markets. Therefore, based on the second profit warning from the company in the last 10 months, we now believe that the company will continue to demonstrate lower profitability in the face of these structural trends.
Given Metro's focus on improving its working capital position in 2012 and lowering its capital expenditures for 2013, we believe that the company will be able to maintain an FFO to debt ratio of about 20% in December 2012 and December 2013. Nonetheless, we think that inflexible dividend payments could jeopardize Metro's goals for improving cash flow and reducing net debt, given its ownership structure. German operating holding company Franz Haniel & Cie GmbH (FHC; BB/Stable/B) owns 34.2% of Metro and is one of its controlling shareholders. Metro's "significant" financial risk profile under our criteria with sizable debt on a lease-adjusted basis has yet to benefit meaningfully from the group's real estate and noncore assets as potential sources of financial flexibility.
The short-term credit rating is 'A-3'. We view Metro's liquidity as "adequate" under our criteria. We base our opinion on our estimate that liquidity sources will exceed funding needs by more than 1.2x in the next 12 months.
As of June 30, 2012, we estimate liquidity sources in excess of about EUR6.6 billion.
-- Surplus cash of EUR1.6 billion, excluding EUR0.15 billion which we regard as tied up in operations;
-- Undrawn revolving credit facilities of about EUR3.1 billion maturing in more than 12 months, of which EUR1.5 billion mature in 2015 and EUR1 billion in 2017; and
-- EUR1.6 billion of reported funds from operations (FFO) that we forecast over the next 12 months.
We estimate Metro's liquidity needs over the next 12 months to be about EUR4.8 billion, consisting of:
-- EUR3 billion of short-term debt,
-- EUR1.2 billion of cash relevant capex, and
-- Up to EUR0.6 billion in dividends based on the historic track record.
The stable outlook reflects our view that Metro has enough financial flexibility to maintain its credit ratios in line with our rating guidance, namely adjusted FFO to debt and debt to EBITDA ratios of about 20% and 3.5x, respectively, in December 2012 and December 2013. Our base-case scenario assumes that the adjusted EBITDA margin will fall by about 50 basis points in 2012 before stabilizing and that Metro will reduce its capital expenditures.
We could lower the ratings if Metro appears unable keep credit ratios in line with our guidance. Such a possibility would arise in the case of a sharper-than-anticipated deterioration of operating performances or if the company adopts a more shareholder-friendly financial policy.
We could raise the rating if Metro succeeds in turning around the currently negative business trends and improves its key financial metrics to above 25% FFO to debt and 3.0x debt to EBITDA. We consider such an outcome unlikely over the next 12 months.
Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal.
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009 Ratings List Downgraded; Outlook Action To From Metro AG Corporate Credit Rating BBB-/Stable/A-3 BBB/Negative/A-2 Senior Unsecured BBB- BBB Commercial Paper A-3 A-2 Downgraded Metro Euro-Finance B.V. Commercial Paper A-3 A-2 Metro Finance B.V. Senior Unsecured BBB- BBB
Metro International Finance B.V.
Senior Unsecured BBB- BBB
(Caryn Trokie, New York Ratings Unit)