(The following statement was released by the rating agency)
Oct 12 - Fitch Ratings has assigned Dufry AG , a Long-term Issuer Default Rating(IDR) of 'BB'. The Outlook is Stable. Fitch has also assigned Dufry's planned USD500m eight-yearunsecured notes, to be issued by Dufry Finance S.C.A., an expected rating of 'BB(EXP)'.
The bond launch will refinance near-term loan maturities and follows Dufry'srecently announced acquisition of a 51% stake in the Greek travel retailoperations of Folli Follie Group . This acquisition will be funded throughCHF290m recently priced new shares in Dufry and a five-year EUR335m non-recoursecredit facility. This non-recourse facility will be provided by a syndicate oflocal banks, secured only through pledges of 100% of shares in the acquiredbusiness without guarantees provided outside the ring-fenced acquisition group.
The final ratings on the planned notes are contingent upon the receipt of finaldocuments conforming to information already received by Fitch.
Dufry's 'BB' IDR is supported by the issuer's moderate business risk profile asit benefits from a leading position in the high-growth air travel retail market,with solid geographic diversification that is balanced between emerging anddeveloped markets. The rating also reflects Dufry's low operating leverage, withproperty costs that are largely turnover-based with modest levels of minimumpayment guarantees. This provides Dufry with some overhead flexibility whenfaced with moderately cyclical passenger numbers. Solid underlyingsocio-economic drivers such as worldwide GDP growth, increased disposableincomes in emerging markets, trends towards greater air transport accessibilityand airport privatisations further underpin the rating.
Negative rating factors include the concentration of revenues in the air travelretail market with limited channel diversification outside the predominantlyairport-based duty free and paid format. Some geographic concentration alsoexists with the US and Brazil representing nearly half of revenues, exposingDufry to potentially slowing growth or travel disruptions from these regions. Inaddition, the company faces risks related to potential margin erosion fromincreasing concession payment fees to airport operators as the number ofcontracts subject to renewal is expected to increase over the next two to threeyears. The risk of margin erosion is mitigated by cost saving initiatives suchas gross margin expansion through better sourcing or enhanced product mix, andcontinued organic expansion generating economies of scale. Some comfort is takenfrom Dufry's historically high contract renewal rates.
Dufry's financial risk profile is low due to an EBITDAR margin that isrelatively high within the wider retail peer group and free cash flow that hasbeen consistently positive. Dufry currently demonstrates a solid de-leveragingprofile. Funds from operations (FFO) net adjusted leverage expected to declinebelow 4x in 2013 from 4.8x in 2011 following the peak in leverage resulting fromdebt-funded acquisitions in South and Central America. Given strong free cashflow generation, averaging 5% of sales per annum by 2015, Fitch expects leverageto remain sustainably below 4x with FFO fixed charge cover approaching 3x overthe rating horizon.
Dufry's IDR incorporates some headroom for future debt-funded acquisitions asFitch understands M&A is an integral part of the growth strategy. Fitchevaluates Dufry's liquidity profile as solid with an undrawn CHF650m revolvingcredit facility ("RCF") and good cash on balance sheet. The RCF is a newfacility maturing in 2017 and refinanced a CHF415m RCF that was due to expire in2013. Prior to announcing the planned bond issue, Dufry had manageable debtmaturities given its available liquidity and access to bank financing.
Dufry's planned Senior Unsecured notes, which are being issued by Dufry FinanceS.C.A., will rank pari-passu with the CHF650m RCF borrowed by DufryInternational AG and all future senior unsecured obligations. The bond willbenefit from first ranking guarantees provided on an unsecured basis by DufryInternational AG, Dufry AG, Dufry Holdings & Investments AG, Hudson Group (HG),Inc. representing 100% of the group's EBITDA excluding the ring-fenced Greekacquisition. Fitch notes that restricted subsidiary permitted indebtedness islimited by a weak debt incurrence-based interest cover covenant test above 2.0x.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead topositive rating action include
- Further improvement in operating profitability through organic businessgrowth, accelerated debt prepayment that reduces FFO net adjusted leveragebeyond Fitch's current expectations to below 3.5x on a sustainable basis;
- FFO fixed charge coverage ratio of 3x or above on a sustained basis.
Negative: Future developments that may, individually or collectively, lead tonegative rating action include
- FFO net adjusted leverage at or above 4.5x over a sustained period due to asignificant decline in profitability versus Fitch's expectations or a moreaggressive acquisitive growth strategy;
- Permanent reduction in operating profitability leading to EBITDA margins below13%;
- FFO fixed charge coverage below 2.5x; - Negative organic revenue growth dynamics for more than one year
Fitch may have provided another permissible service to the rated entity or itsrelated third parties. Details of this service can be found on Fitch's websitein the EU regulatory affairs page.