OREANDA-NEWS. Fitch Ratings has affirmed Decomeubles Partners SAS's (BUT) Long-term Issuer Default Rating (IDR) at 'B-' with a Stable Outlook. The agency has also upgraded BUT SAS's EUR180m senior secured notes by one notch to 'B+'/'RR2'/74% from 'B'/'RR3'/69% .

BUT's IDR continues to reflect the issuer's size and its strong market and brand position in the French home improvement market. Fitch expects BUT to benefit from further consolidation, particularly with a focus on growth in the value segment and at the expense of independent retailers.

Since refinancing in 2014, BUT's management has implemented a series of self-help measures aimed at improving the group's operational cost base, supply chain and logistics as well as the customer offering, which we think will lead to improved year-on-year profitability and cash generation in FY15 (fiscal year ending June 2015). This has increased the group's headroom under the rating and triggered the improving debt recovery assumption. However the Outlook remains Stable as we expect BUT's financial and operating performance to remain steady against a backdrop of challenging market conditions. Evidence of BUT's ability to protect underlying performance improvements, as well as defensibility of its evolving business model could drive a positive rating action if it translates into a conservatively managed balance sheet.

KEY RATING DRIVERS
Improved Financial Headroom
We expect funds from operations (FFO)-adjusted gross leverage for FY15 based on management guidance for the full year to improve to just under 6.0x (FY14: 7.0x) with FFO fixed charge cover at 1.5x (1.2x), which increases rating headroom relative to Fitch's defined sensitivities.

Whilst last year's refinancing left BUT with fairly manageable on balance-sheet debt, high rental expenses translate into an aggressive financial risk profile. This is reflected in the group's lease-adjusted debt protection ratios (which Fitch has conservatively based on the full value of 'occupancy costs' as presented by management).

Evolving Business Model
BUT's management continue to successfully focus on streamlining and optimising the customer offer and optimising cost and cash management by simplifying its supply chain and centralising the logistics function domestically. In addition, it is also aiming to increase direct control over its brand and store appearance by moving away from the traditional franchise model and taking a more centralised approach to key management decisions including range, pricing, marketing and multi-channel offering. The evolving business model and operating efficiencies including a strong focus on working capital have strengthened the underlying profitability and cash generation of the business with FY15 (ending June) expected like-for-like growth of 1.8%, a 100bps EBITDA margin improvement and a free cash flow (FCF) margin trending towards 2.0%.

Profitability Supported by Consumer Financing
Credit income generated from consumer financing supports EBITDA, adding approximately 100bps to the EBITDA margin. Consumer finance is a key part of BUT's promotional activity, a strong sales driver, and a source of differentiation against competitors, leading to a 25% credit penetration rate of its customer base. Given the integral role of consumer finance in BUT's business model and the ring-fenced nature of the associated credit risk, Fitch includes the consumer finance contribution in its operating EBITDA calculation.

The group offers consumer finance products (including store cards, instalment loans, personal loans) in combination with Cetelem (the consumer finance arm of BNP Paribas Personal Finance), which manages credit risks on a non-recourse basis for BUT. In addition, BUT offers appliance warranties, which are managed via an in-house insurance vehicle. The consumer finance and insurance arrangements are subject to regulatory risks.

Asset Light Business Model
Since its original buy-out in 2008, BUT has gradually implemented an 'asset-light' business model by selling and leasing back assets, particularly with regard to its owned store network and logistics operations. The key assets in the business therefore remain the brand value and inventory, which is reflected in Fitch's debt protection ratio analysis (adjusted for lease obligations) and recovery analysis. While an asset-light capital structure is not uncommon in non-food retail, it leads to pressures on profitability and cash flows due to high rental costs. This translates into high operating leverage and potentially a volatile earnings profile in a downturn.

Geographic Concentration, Competitive Pressures
Limited geographic diversification and concentration on the French retail market are a key rating constraint. This is particularly true in a subdued, albeit stabilising French consumer environment characterised by limited near-term economic stimuli. In addition, Fitch expects further medium-term consolidation and competitive pressures at the value end of the home equipment market in France.

Fitch notes the concentration of market share amongst the top three national players in the home equipment market, which have been able to grow market share amongst each to 45.9% in FY14 (from 40.6% in FY2009), at the expense of independent and local players. Fitch believes that in this context BUT's strategy to concentrate on network expansion in smaller cities is sensible in that it should help boost and defend market share.

Established Brand, Market Position
The ratings reflect BUT's position as a leading home equipment retailer in France, with a strong nationwide store footprint and a diversified product range spanning across home furnishing and decoration, domestic appliances as well as select home-related consumer electronics. BUT's promotional-driven business model is supported by a strong and well-recognised retail brand.

Above Average Recoveries
Fitch believes that expected recoveries would be maximised in a going-concern scenario rather than in a liquidation scenario given the asset-light nature of BUT's business, where Fitch views the brand value and established retail network as key assets. Fitch estimates that senior secured noteholders could expect a recovery rate estimated at 74% (RR2), leading to a two-notch uplift for the senior secured instrument rating from the IDR to 'B+'. However, the 74% recovery assumption is at the lower end of the 'RR2' recovery category and hence subject to revision should underlying recovery assumptions and/or the debt amount change. For its recovery assumptions Fitch applies a 35% distressed EBITDA discount partially incorporating the year-on-year improvement in profitability as permanent enhancement, and a 4.5x EV/EBITDA multiple.

The expected senior secured recovery is underpinned by guarantors representing at least 85% of the group's EBITDA and by noteholders' second-ranking claim on any enforcement proceeds in a distressed sale of assets or the business.

KEY ASSUMPTIONS
Fitch's expectations are based on our internally produced, conservative rating case forecasts over the four-year rating horizon. They do not represent the forecasts of rated issuers individually or on aggregate. Key Fitch forecast assumptions include:
- Moderate like for like sales growth, below GDP assumptions
- Stable EBITDA margins reflecting the benefits achieved in FY15 mitigated by competitive pressures and consolidation in the French home equipment market
- Continued focus on supply chain and working capital management
- Disciplined approach to capex representing 1.9%-2.2% of annual sales

RATING SENSITIVITIES
Future developments that, individually or collectively, could lead to positive rating action include:
- FFO adjusted gross leverage at 6x or below, FFO fixed charge cover at above 1.5x, combined with market share gains and improvements in FCF generation and operating profitability, all on a sustained basis

Future developments that, individually or collectively, could lead to negative rating action include:
- FFO gross lease adjusted leverage of 7.0x or above on a sustained basis
- FFO fixed charge cover of 1.0x or below on a sustained basis
- A significant deterioration in market share, revenues and/or operating profitability
- Negative FCF eroding the group's liquidity buffer

LIQUIDITY
Adequate Mid-Term Liquidity
Fitch views BUT's liquidity as adequate in its medium-term rating case supported by the availability of the EUR30m RCF coupled with reported cash on balance sheet of EUR108m (FYE14). Of this amount Fitch deducts EUR40m as not readily available to allow for seasonal working capital fluctuations and restricted cash related to consumer financing. This is adequate as BUT does not face any meaningful debt redemptions until 2019.