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"Metro's Horeca division, which serves hotels, restaurants and caterers, accounted for 48% of its revenue in fiscal 2019 (ended on 30 September 2019). "
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Rating Action: Moody's places Metro's ratings on review for downgrade
27 Mar 2020
Paris, March 27, 2020 -- Moody's Investors Service, ("Moody's") has today placed on review for downgrade the Ba1 corporate family rating (CFR) and Ba1-PD probability of default rating (PDR) of METRO AG (Metro). Concurrently, Moody's has placed on review for downgrade the Ba1 senior unsecured rating and the (P)Ba1 senior unsecured medium-term notes program ratings of Metro and METRO Finance B.V. The NP commercial paper rating and the (P)NP short-term program ratings of Metro and METRO Finance B.V have been affirmed. The outlook has been changed to ratings under review from stable for both entities.
RATINGS RATIONALE
The rapid and widening spread of the Coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. This shock will significantly affect Metro's earnings because it caters to many business customers whose operations have been disrupted by the coronavirus.
Metro's Horeca division, which serves hotels, restaurants and caterers, accounted for 48% of its revenue in fiscal 2019 (ended on 30 September 2019). Moody's thinks that these end-customers will have been severely hit by the recent quarantine measures that many European countries decided in recent weeks. Consequences on Metro's credit quality are uncertain for the moment and will depend on the duration of the epidemic and how it will affect consumer demand. Most European governments, including Germany, have announced a package of measures to support corporates, which will limit losses and cash outflows during the lockdown period.
Moody's sees a possibility that the earnings decline may offset the recent improvement in credit quality, and in particular liquidity, coming from asset disposals. Since October 2019, Metro has announced the sale of its Chinese operations for an enterprise value of €1.9 billion and of its hypermarket chain Real for €1 billion. The group has not yet indicated how it will allocate divestment proceeds.
On the positive side, Metro primarily sells food items, which are more stable than non-food products in a downturn, and has a good geographic diversity, with 91% of its reported EBITDA generated outside Germany in fiscal year 2019.
The review process will focus on (1) the duration of the coronavirus epidemic and the measures that states will implement to support their economies; (2) the effects of the outbreak on Metro's customers; (3) the trajectory of Metro's earnings, leverage and free cash flows; (4) the allocation of divestment proceeds; and (5) Metro's ability to maintain an adequate liquidity.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Quantitatively, Moody's would consider a negative rating action if Metro fails to maintain a Moody's-adjusted (gross) debt/EBITDA below 5.0x and over time below 4.75x, or if the Moody's-adjusted retained cash flow/net debt ratio does not significantly exceed 10%. A weakening in liquidity would also trigger a rating downgrade. A more aggressive financial policy, as shown for instance by a failure to allocate most disposal proceeds to debt repayment, could also cause a negative rating action.
While an upgrade is unlikely in the short-term, Moody's could take a positive rating action if Metro improves its profitability and stabilises its earnings in emerging markets. Quantitatively, a positive rating action could emerge if the Moody's-adjusted (gross) debt/EBITDA falls sustainably below 4x and if the Moody's-adjusted retained cash flow/net debt ratio exceeds significantly 15%. A rating upgrade would also require a reduced reliance on short-term debt enabling Metro to maintain an adequate liquidity despite seasonal swings in working capital.
ESG CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Metro of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
STRUCTURAL CONSIDERATIONS
Moody's rates the senior unsecured notes Ba1, in line with the corporate family rating despite a degree of structural subordination arising from the material level of trade payables at the operating subsidiary's level.
Our Loss Given Default analysis is based on an expected family recovery rate of 50%, which reflects a capital structure comprising bonds and bank debt.
COMPANY PROFILE
Headquartered in Düsseldorf, Germany, Metro is one of the largest food wholesalers and retailers in Europe, with revenue of €27.1 billion and Moody's-adjusted EBITDA of €1.5 billion in fiscal 2019. The group was created by the demerger of the former Metro-Ceconomy group, whose shareholders agreed in June 2017 to split the operations between CECONOMY AG, which took over consumer electronics, and Metro Wholesale & Food Specialist, which gathered the food wholesale and retail operations. Metro Wholesale & Food Specialist subsequently changed its name to Metro AG.
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