Fitch Downgrades Dufry AG to 'BB-'; Outlook Negative

FRANKFURT, Germany & LONDON--(BUSINESS WIRE)-- 01 April 2015

Fitch Ratings has downgraded Swiss retailer Dufry AG's (Dufry) Issuer Default Rating (IDR) and Dufry Finance S.C.A.'s senior unsecured notes to 'BB-' from 'BB'. The Outlook is Negative.

Fitch has also assigned an expected rating of 'BB-(EXP)' to Dufry Finance S.C.A.'s new senior unsecured notes of up to CHF1,100m with an expected maturity of eight years.

The senior unsecured notes, including the new issuance, are rated as the same level as the IDR, ranking equally among themselves and the new and existing term loans.

The rating actions follow Dufry's announcement to acquire World Duty Free Group (WDF), which is subject to shareholders' and anti-trust approvals, and reflect the resultant increase in leverage and operational risk at the company. Fitch expects Dufry's FFO adjusted gross leverage to increase by up to 1.0x to 7.0x from FY14's level and the company to face operational challenges in integrating WDF, which is taking place in parallel with the integration of Nuance Group purchased in 2014. The Negative Outlook reflects Fitch's expectation that it would take longer than two years for Dufry to reach the target FFO adjusted net leverage of 5.0x, which we view as compatible with a 'BB-' rating.

KEY RATING DRIVERS

Pressure from Execution Risks

A simultaneous integration of two transformational acquisitions such as WDF and Nuance, which together equal Dufry on a stand-alone basis, materially increases the execution risks. Unsuccessful and /or delayed integration of the new operations could lead to earnings and cash flow margin dilution, weakening Dufry's operational profile and materially impacting its ability to de-leverage.

Improving Competitive Profile

We acknowledge the compelling industrial logic behind the acquisition and the strong credit-enhancing impact it will have on Dufry's business profile through scale-driven efficiencies. The merits of Dufry's business model for the stability of its performance are evidenced in the steady organic growth over the last five years. We expect this trend to continue in the long run, despite an inherently volatile operating environment that is exposed to volume risks.

Weakened Credit Metrics

Fitch considers that Dufry's credit metrics are no longer commensurate with 'BB' financial risk. Assuming completion of the full purchase of Dufry at the intended valuation of EUR3.7bn by 3Q15, we expect FFO adjusted gross leverage to reach 7.0x at end-2015 and remain at 6.0x- 6.5x thereafter. We forecast a FY15 FFO-based net leverage should drop gradually to approximately 5.0x at FYE18. The pace of de-leveraging before Dufry can reach the net leverage target of 5.0x is slower than we had previously expected. We also forecast a FFO fixed charge cover of 2.3x during the same period, down from our previously estimated 2.5x. All this contributed to our decision to downgrade Dufry to 'BB-' from 'BB' and maintain Negative Outlook.

No Further Debt-Funded Acquisitions

The Fitch base case assumes no further debt-funded acquisitions. Any business acquisition in the medium term, which is most likely to be of non-transformational nature, will have to be funded with internal cash in combination with equity for it not to threaten the current ratings. Our assessment of further non-dilutive acquisitions would also be conditional on evidence of a successful integration of Nuance and WDF by end-2016 through a sustained expansion of earnings and cash flows.

LIQUIDITY AND DEBT STRUCTURE

Strong Internal Liquidity

We project the post-acquisition Dufry should generate between CHF200m-CHF400m of annual free cash flow, which is sufficient to address its operating needs and implement the new business plan. We also expect consistent accumulation of cash reserves exceeding an aggregate CHF1bn by end-2018, after considering restricted or otherwise not readily available cash of CHF100m. Dufry also has an RCF of CHF900m due in July 2019, of which CHF157m was drawn at end-2014.

Diversified Funding

Dufry benefits from a highly diversified back-ended funding structure containing public debt (40% of total committed debt) and bank loans (60%). All of the bank debt, assuming final maturity of the new term loan is in line with information received by Fitch, is due in 2019. The public debt is due between 2020 and 2023 (subject to change following launch of the new public debt instruments).

KEY ASSUMPTIONS

Fitch's key assumptions for our rating case for Dufry include:

- sales growth in FY15-16 driven by the WDF and Nuance acquisitions, thereafter at 3% p.a.

- minimum guaranteed payments for concessions at 4% of sales

- stable EBITDA margin at around 13%

- capex at 3% of sales

- dividends to minorities equal to 5% of EBITDA, no dividends to shareholders

- no further acquisitions

RATING SENSITIVITIES

Negative: Future developments that could lead to a downgrade include:

- Fitch's expectation that beyond the second year from completion of the transaction, FFO adjusted gross leverage would remain above 5.5x (or 5.0x on a net basis) and FFO fixed charge cover below 2.25x, due to an adverse shift in the operating environment, persisting organic issues and/or continuing appetite for debt-funded acquisitions

- EBITDA margin less than 12% coupled with FCF margin below 4% on a sustained basis, particularly as a result of challenges in integrating the WDF acquisition

Positive: Future developments that could lead to the Outlook being revised to Stable include:

-Fitch's confidence that a decrease of FFO adjusted gross leverage towards 5.5x (net 5.0x) and FFO fixed charge cover remaining above 2.25x is achievable within two years from completion of the transaction and EBITDA margin remaining above 12%, coupled with FCF margin above 4% on a sustained basis

In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different from the original rating committee outcome.

Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.

Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are available at www.fitchratings.com.

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

Additional Disclosure

Solicitation Status

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Fitch Ratings
Principal Analyst
Patrick Durcan
Analyst
+44 20 3530 1298
Supervisory Analyst
Elena Stock
Director
+49 69 76 80 76 135
or
Fitch Deutschland GmbH
Taunusanlage 17
D-60325 Frankfurt am Main
or
Committee Chairperson
Giulio Lombardi
Senior Director
+39 02 8790 87214
or
Media Relations
Peter Fitzpatrick, +44 20 3530 1103
[email protected].

Source: Fitch Ratings

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