Fri Oct 12, 2012 6:48am EDT
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-year unsecured 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's recently announced acquisition of a 51% stake in the Greek travel retail operations of Folli Follie Group. This acquisition will be funded through CHF290m recently priced new shares in Dufry and a five-year EUR335m non-recourse credit facility. This non-recourse facility will be provided by a syndicate of local banks, secured only through pledges of 100% of shares in the acquired business without guarantees provided outside the ring-fenced acquisition group.
The final ratings on the planned notes are contingent upon the receipt of final documents conforming to information already received by Fitch.
Dufry's 'BB' IDR is supported by the issuer's moderate business risk profile as it benefits from a leading position in the high-growth air travel retail market, with solid geographic diversification that is balanced between emerging and developed markets. The rating also reflects Dufry's low operating leverage, with property costs that are largely turnover-based with modest levels of minimum payment guarantees. This provides Dufry with some overhead flexibility when faced with moderately cyclical passenger numbers. Solid underlying socio-economic drivers such as worldwide GDP growth, increased disposable incomes in emerging markets, trends towards greater air transport accessibility and airport privatisations further underpin the rating.
Negative rating factors include the concentration of revenues in the air travel retail market with limited channel diversification outside the predominantly airport-based duty free and paid format. Some geographic concentration also exists with the US and Brazil representing nearly half of revenues, exposing Dufry to potentially slowing growth or travel disruptions from these regions. In addition, the company faces risks related to potential margin erosion from increasing concession payment fees to airport operators as the number of contracts subject to renewal is expected to increase over the next two to three years. The risk of margin erosion is mitigated by cost saving initiatives such as gross margin expansion through better sourcing or enhanced product mix, and continued organic expansion generating economies of scale. Some comfort is taken from Dufry's historically high contract renewal rates.
Dufry's financial risk profile is low due to an EBITDAR margin that is relatively high within the wider retail peer group and free cash flow that has been consistently positive. Dufry currently demonstrates a solid de-leveraging profile. Funds from operations (FFO) net adjusted leverage expected to decline below 4x in 2013 from 4.8x in 2011 following the peak in leverage resulting from debt-funded acquisitions in South and Central America. Given strong free cash flow generation, averaging 5% of sales per annum by 2015, Fitch expects leverage to remain sustainably below 4x with FFO fixed charge cover approaching 3x over the rating horizon.
Dufry's IDR incorporates some headroom for future debt-funded acquisitions as Fitch understands M&A is an integral part of the growth strategy. Fitch evaluates Dufry's liquidity profile as solid with an undrawn CHF650m revolving credit facility ("RCF") and good cash on balance sheet. The RCF is a new facility maturing in 2017 and refinanced a CHF415m RCF that was due to expire in 2013. Prior to announcing the planned bond issue, Dufry had manageable debt maturities given its available liquidity and access to bank financing.
Dufry's planned Senior Unsecured notes, which are being issued by Dufry Finance S.C.A., will rank pari-passu with the CHF650m RCF borrowed by Dufry International AG and all future senior unsecured obligations. The bond will benefit from first ranking guarantees provided on an unsecured basis by Dufry International AG, Dufry AG, Dufry Holdings & Investments AG, Hudson Group (HG), Inc. representing 100% of the group's EBITDA excluding the ring-fenced Greek acquisition. Fitch notes that restricted subsidiary permitted indebtedness is limited 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 to positive rating action include
- Further improvement in operating profitability through organic business growth, accelerated debt prepayment that reduces FFO net adjusted leverage beyond 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 to negative rating action include
- FFO net adjusted leverage at or above 4.5x over a sustained period due to a significant decline in profitability versus Fitch's expectations or a more aggressive acquisitive growth strategy;
- Permanent reduction in operating profitability leading to EBITDA margins below 13%;
- 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 its related third parties. Details of this service can be found on Fitch's website in the EU regulatory affairs page.
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