OREANDA-NEWS. Fitch Ratings has published Novartex SAS's (Vivarte) Long-term Issuer Default Rating (IDR) of 'CCC'. Fitch has also published a 'B-'/'RR2' rating on Vivarte SAS's EUR500m super senior debt (New Money) due 2019 and a 'CC'/'RR6' rating on Novarte SAS's EUR780m reinstated debt due 2020.

The 'CCC' IDR reflects Vivarte's currently compromised business model in several divisions - in particular the mass-market apparel division, which is mainly composed of the La Halle brand - and the high execution risk associated with its strategic turnaround plan. We view the company's positioning in the mass-market apparel segment as uncompetitive in a fast-changing market. The evolution of Vivarte's business model requires significant investments and also careful prioritisation of them to avoid further brand erosion and customer loss. We acknowledge the size and the diversification of the group's operations, which offer some strategic flexibility to restructure Vivarte's cost base. Operational levers include the realisation of synergies in sourcing and supply chain, brand and store portfolio optimisation and the rationalisation of its customer proposition.

The rating also reflects the company's significant leverage post debt exchange, exacerbated by our expectation of continuing negative free cash flow (FCF) suggesting a weak/partly funded liquidity profile.

KEY RATING DRIVERS
Evolving Business Model
Fitch views the repair of the business model as a key prerequisite for the rating. In the mass market apparel segment in particular, Fitch views the uncertainty around the repositioning of the 'La Halle' brand and restoring a sustainable business model characterised by positive like for like sales trend and profitability as key for Vivarte's weak credit profile. Our assessment, together with the inherent execution risks associated with any turnaround plan, currently constrains the rating to the 'CCC' category.

French Non-Food Retail Environment Subdued
Fitch views Vivarte's concentration in the French market as a key constraint to the rating. We expect the French non-food retail market will remain subdued, constrained by low consumer confidence, high unemployment and projected GDP growth below key European peers.

The French apparel market has been declining since 2007 due to the economic environment but also as a result of changing consumer preferences leading to strong growth of the fast fashion value segment. The footwear market has also experienced pressure on prices and value, albeit to a lesser extent. Fitch views the structural and competitive market pressures as additional headwinds for Vivarte's turnaround strategy, increasing execution risks. Critical success factors in the sector include store network optimisation, a cost-efficient supply chain, clear brand communication and an established multi-channel offering. Management will need to demonstrate progress on all these critical business issues before we recognise any improvement in the perception of credit quality.

High Financial Leverage Post Debt Restructuring
Fitch views the group's financial profile as aggressive and difficult to sustain in the absence of material progress in its strategic turnaround. The large fall in EBITDA in recent months leaves Vivarte in a weakened financial position to invest in the business and to address the more fundamental business model issues despite a large amount of debt being written off (72% of the outstanding notional value) and EUR500m of new liquidity being introduced along with the October 2014 debt restructuring.

Weak Credit Metrics
Fitch projects key financial credit metrics to remain weak under the current strategy, with funds from operations (FFO) fixed charge cover at or below 1.2x and FFO adjusted net leverage above 9.0x over the four-year rating horizon (credit metrics include adjustments for operating leases and cash considered not readily available for debt repayments). In the absence of any debt amortisation, Fitch views improving EBITDA as key driver for potential deleveraging. Uncertainty about EBITDA recovery leads to weak financial flexibility and high refinancing risk.

In its ratio computation, Fitch assumes that EUR120m of cash is not readily available for debt service. This amount reflects Fitch's estimate of minimum liquidity requirement to run the company on a going concern basis, notably to fund working capital seasonality intra year.

Negative FCF to Reduce Liquidity
Fitch views the additional liquidity provided as potentially insufficient to execute the current business plan, subject to any adjustments expected to be delivered under the new management. Fitch expects Vivarte's FCF to remain significantly negative over the four-year rating horizon in the absence of material progress in an operational turnaround. Even assuming a successful turnaround, improved EBITDA will likely be counterbalanced in the mid-term by working capital outflows as the group reviews supply chain arrangements, and by investments related to necessary store refurbishments and technological improvements.

Mixed Debt Recovery Prospects
The 'B-'/'RR2' rating assigned to the EUR500m super senior secured debt reflects our view of above-average recovery prospects for its holders in the event of default. The recovery expectations are driven by a post-restructuring EBITDA approximately 27% below the group's FY14 (financial year ending August 2014) EBITDA of EUR170m, combined with an estimated distressed EV/EBITDA multiple of 5.0x. As such, recoveries would be maximised in a going-concern scenario rather than in a liquidation scenario. This reflects the asset-light nature of Vivarte's business, where Fitch views the underlying brand value and established retail network as key assets.

Super senior secured New Money lenders could expect a recovery rate in the high end of 91%-100% range. However, the Recovery Rating is capped at 'RR2' (71%-90%) due to the French insolvency regime, leading to a two-notch uplift from the IDR to 'B-'. Accordingly we have assigned the Reinstated Debt a Recovery Rating at 'CC'/'RR6' reflecting weak recovery prospects in case of default.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating actions include:
- Evidence of repairing the business model and successful execution of the turnaround strategy particularly in the mass market channel evidenced by defending its market share and positive like-for-like sales, as well as improving profitability. This is a pre-condition to consider any upgrade.
- Reducing financial risks, evidenced by positive FFO generation and a FFO fixed charge cover sustainably above 1.0x driving a steady reduction in financial leverage.

Negative: Future developments that could lead to negative rating action include:
- Inability to repair the business model leading to continued negative FCF generation increasing leverage and eroding liquidity.
- Breach of maintenance covenants resulting in further distressed debt restructuring and/or seriously impaired liquidity.