OREANDA-NEWS. This announcement corrects the version published earlier today, which incorrectly stated the issuer of the senior notes.

Fitch Ratings has downgraded Picard BondCo S.A.'s (Picard) Long-term Issuer Default Rating (IDR) to 'B' from 'B+' and Picard Groupe S.A.S.'s senior secured floating-rate notes (FRNs) and revolving credit facility (RCF) ratings to 'BB-'/'RR2' from 'BB'/'RR2'. Fitch has removed the ratings from Rating Watch Negative (RWN) where they were placed on 5 February 2015. Fitch has simultaneously assigned a final instrument rating of 'CCC+'/'RR6' to Picard BondCo S.A.'s EUR428m 2020 senior notes. The Outlook on the IDR is Stable.

The rating actions follow the completion of a EUR601m dividend upstream from Picard to its sponsor, Lion Capital. A further EUR18m dividend has been up-streamed from Picard PIKco, but this does not affect Picard's IDR, in Fitch's view. The dividend recapitalisation has been financed with EUR20m additional PIK notes issued at the Picard PIKco S.A.'s level, a tap issue of the existing EUR480m senior secured FRNs due 2019 to a total of EUR822m at Picard Groupe S.A.S.'s level, and an issue of EUR428m new senior notes due 2020 at Picard's level. The existing EUR185m senior notes due 2018 have been redeemed as part of the transaction.

The rating actions reflect the sponsor's aggressive financial policy leading to higher leverage and refinancing risk, which results in a financial profile more in line with 'B-' rated peers. The IDR remains underpinned by Picard's strong business profile and ability to generate sustained positive free cash flow (FCF) in the low to mid-single digits as a percentage of sales. However, due to the group's high leverage and refinancing risk, any underperformance to Fitch's rating case would lead to negative rating action.

KEY RATING DRIVERS
Aggressive Sponsor, Refinancing Risk
Fitch views the sponsor's financial policy, which demonstrates low equity involvement, as aggressive. We expect Picard's lease-adjusted FFO net leverage to increase to 7.9x at FYE15 (financial year ending March 2015). This compares to 5.3x under previous capital structure. We expect leverage to remain above 6.5x at FYE18 (versus 4.2x under the previous capital structure). As we consider that the group's deleveraging pace should not be significantly affected by the new capital structure thanks to the group's strong business model and cash flow generation capacity, the higher refinancing risk is a direct consequence of the group's debt re-leveraging. This acts as a key constraint on the rating.

Resilient Business Model
Picard BondCo's like-for-like sales started to recover in 4Q FY14 and grew 0.8% in 1H FY15. Fitch expects some acceleration over the next three years albeit with annual growth remaining lower than pre-2008. This is due to growing competition among food retailers to increase customer traffic through more attractive store formats and selling prices.

Low Execution Risk in Strategy
Fitch believes management's expansion strategy, which now includes development through franchises, has a low execution risk. Picard's franchises would contribute less to revenues and EBITDA than owned stores. However, they do not represent significant risk as the establishment cost will be low for Picard, and if the franchises are not successful, the related loss will not be significant either. However, Fitch notes that the growing inclusion of franchises in the group's business model slightly increases the exposure to potential food scares as the group has less control on franchises' operations than on own stores.

Operating Margin Pressure
Fitch expects Picard's EBITDA margin to stabilise at around 13.5% in the next four years following the FY11 peak of 14.6% (FY14:13.4%). The limited profitability recovery from FY14 reflects expansion-related costs and our expectation of consistently high marketing costs due to continued competitive pressure. A growing cost base, although under control, should be only partially offset by subdued like-for-like sales growth.

Slow Geographic Diversification
Picard's unproven ability at diversifying its activities geographically is a rating constraint. While we acknowledge Picard's expansion opportunities in the long term, we factor in limited contribution to the overall group sales and profits within the next five years. However, we expect moderate execution risks in entering new markets initially via either concessions-in-shops (Japan) or franchises (Switzerland). Furthermore Fitch views positively management's cautious approach to foreign expansion as we believe a slowdown in owned-store openings would not significantly affect the group's cash flow prospects under the new debt structure.

Lower but Still Strong FCF
Under the new capital structure we expect FCF generation capacity to be slightly lower than under the previous one, primarily due to higher interest costs. We forecast higher interest costs will be only partially compensated by the EBITDA uplift from new franchises requiring no capex. Low cash flow volatility continues to reflect the group's resilient gross profit margin and its flexibility to scale back expansion capex without eroding EBITDA and FFO generation. The solid cash flow generation capacity provides adequate financial flexibility and liquidity to the group's operations.

Weak Expected Recoveries for Senior Notes
The senior secured FRNs and RCF ratings of 'BB-'/'RR2' indicate above-average recovery prospects, in the range of 71%-90%. Picard's senior notes' rating of 'CCC+'/'RR6' reflects weak recovery prospects in case of default in view of the payment waterfall. The recovery expectations are driven by a post-restructuring EBITDA around 30% below the group's adjusted LTM September 2014 EBITDA of EUR182m, combined with an estimated going concern enterprise value/EBITDA multiple of 6.0x in distress.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case include:
- Acceleration of annual revenue growth towards the mid-single digits from FY17, supported by mild strengthening of French like-for-like sales and network expansion
- EBITDA margin stabilisation at about 13.6% of sales
- Annual capex at 2.6% of sales on average, reflecting owned stores openings and store remodelling in France
- No dividends
- Annual FCF at 4.4% of sales on average

RATING SENSITIVITIES
Positive: We believe an upgrade of the IDR is unlikely over the rating horizon as Picard's financial ratios are reliant on a significant improvement in the group's operating performance, which we do not foresee. If Picard's business model remains resilient, future developments that would lead to positive rating actions include:
- FFO adjusted gross leverage sustainably below 6.0x (5.5x net of readily available cash).
- FFO fixed charge cover sustainably above 2.5x (FY14: 1.9x).

Negative: Future developments that could lead to negative rating action include:
- Refinancing of Picard PIKCo S.A.'s PIK notes through a debt instrument with terms and conditions that may place the FRNs and senior note holders in a less favourable position.
- FFO adjusted gross leverage sustainably above 7.5x (7.0x net of readily available cash), combined with:
- Deterioration in like-for-like sales and EBITDA margin.
- FCF generation below 4.0% of sales
- FFO fixed charge cover below 1.5x.