OREANDA-NEWS. Fitch Ratings has affirmed UK-based New Look Retail Group Ltd's (New Look) Long-term Issuer Default Rating at 'B-' with Stable Outlook. The agency has also assigned New Look Secured Issuer PLC's GBP1bn senior secured notes (both floating- and fixed-rate notes) due 2022 and New Look Senior Issuer PLC's 8% GBP200m senior notes due 2023 final ratings of 'B' with Recovery Rating 'RR3' and 'CCC' with Recovery Rating 'RR6' respectively.

Following the completion of the acquisition of New Look Retail Group Ltd by South African investment holding Brait S.E., the proceeds from the new bond issuance were applied to refinance all previous debt (incl. PIK instruments). Therefore the assigned IDR and Stable Outlook reflect New Look's ability to establish a long-term capital structure to support expected accelerated growth of the business under new ownership and to optimise financing mix and costs. The terms of the issued notes are materially in line with Fitch's assumptions as detailed in the agency's rating action commentary dated 9 June 2015.

KEY RATING DRIVERS FOR THE NOTES

Above-Average Recovery Expectations
The senior secured and senior instrument ratings reflect Fitch's expectation that recoveries for creditors will be maximised in a going-concern restructuring, rather than in liquidation, due to the fairly asset-light nature of the business. As such, Fitch has applied a 25% discount to FYE15 (year ended March 2015) EBITDA and a distressed multiple of 5.0x, which results in above-average expected recoveries ('RR3' or 51% recovery expectation at the lower end of the 'RR3' range) for the senior secured note holders but negligible recoveries ('RR6' or 0%) for the senior notes.

Accordingly the instrument rating for the senior secured notes is notched up by one to 'B' and the senior notes notched down by two to 'CCC' from New Look's IDR.

Weak Protection; No Dividends Expected
The senior secured notes and senior notes are structured with incurrence-based covenants only and allow for cash dividends, which can be increased subject to financial covenant testing. The IDR, however, assumes no cash dividend payments over the four-year rating horizon, in line with management's view.

Comprehensive Security Package
The senior secured notes benefit from a security package characterised by share pledges and a guarantor group capturing 83% and 95% of the consolidated revenue and adjusted EBITDA of the restricted group respectively, and representing 80% of the consolidated assets of the restricted group (as per 52 weeks ended 28 March 2015). The security is shared with the senior notes, albeit on a second-ranking basis, with seniority governed by an inter-creditor agreement. The senior secured notes rank behind the revolving credit facility, operating facilities and certain permitted hedging obligations.

KEY RATING DRIVERS FOR THE IDR

Aggressive Financial Profile
Post recapitalisation, Fitch considers New Look's IDR to remain constrained by its high financial leverage (funds from operations (FFO) gross leverage remains unchanged at around 7.0x) but is mitigated by a structural improvement in the FFO fixed charge cover ratio (to more than 1.5x) as New Look optimises its debt mix. Fitch views these debt protection ratios in line with a 'B-' rating compared with Fitch's speculative-grade European general/non-food retailers.

Fitch recognises top-line growth as key to future deleveraging. The Stable Outlook reflects our expectation of limited deleveraging prospects, driven by moderate execution risks of the group's strategy from the recently announced change of ownership as well as the limited track record of the business model across the cycle.

Focus on Broadening Brand's Reach
Under its new ownership, Fitch does not expect near-term changes to the group's underlying strategy, characterised by broadening and diversifying the brand's appeal and reach. In its UK home market we expect this would be achieved by differentiated price points, diversifying into accessories as well as accelerating its focus on menswear, aided by further multi-channel integration.

International Expansion Focus Narrowed
Fitch considers geographic diversification as rating-positive as it reduces reliance on the UK consumer; however, we highlight some execution risks in establishing the brand abroad. New Look has increased their focus targeting investments in four core markets: China, France Germany and Poland, following the exit of its Russian and Ukrainian franchise.

Fitch views the near-term momentum for international growth coming predominantly from investment in China (where the group has now opened 30 stores since entering the market in February 2014). Operations in France would benefit from further rebalancing following the disposal of its loss-making MIM brand in FY15, while management are taking a cautious approach expanding into Germany and Poland, both characterised by mature/complex retail environments.

Online Focus
Online presence and multi-channel integration is becoming a key differentiating and success factor in the fast-fashion business model and a key growth driver for New Look's UK business. Online brand positioning and social media presence are increasingly underpinning the brand's reputation for fashion trends and building customer loyalty.

We expect these trends to translate into steady EBITDA margins, although we conservatively factor in a mild decline over the four-year rating horizon, as New Look continues to invest in its online business, in integrating its in-store and online experience as well as improving logistics.

Satisfactory Cash Generation & Liquidity
Fitch views New Look's liquidity position as adequate, comprising a minimum GBP50m of readily available cash balances in addition to GBP100m senior secured revolving credit facility (increased from previously GBP75m). In addition, Fitch's projected positive free cash flow (FCF) margin remains acceptable in the low- to mid-single digits of sales over the four-year rating horizon. However, in FY16 we estimate FCF will be negatively impacted by assumed transaction and breakage costs associated with the refinancing.

KEY ASSUMPTIONS

Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:
-Continued positive top-line momentum driven by positive l-f-l growth as a result of developing a broader product offering in the UK and supported by focused international expansion, albeit from a low base.
-Stable EBITDA margin over FY15-FY17 slightly eroding thereafter due to continuing investments to sustain the brand presence.
-Cautious approach to investment and capital spending with net capex estimated at 4.5% of sales.
-No dividend pay-outs, acquisitions and/or material disposals
-Sensitivity to FX volatility to rise as international exposure increases.

RATING SENSITIVITIES

Negative: Future developments that could lead to a negative rating action include:
-FFO fixed charge cover below 1.2x (FY15: 1.5x) as a result of continued negative FCF generation (which Fitch defines after dividends) eroding the group's liquidity position
-FFO adjusted gross leverage (incl. senior unsecured debt) above 8.0x (FY15: 7.1x)
-EBITDA margin below 10% (FY15: 14.8%) as a result of market share pressure in the core UK market amid intense competitive pressures and unsuccessful diversification of the brand.

Positive: At present the high financial leverage and evolving business model, targeting improved diversification and scale, make an upgrade in the near term unlikely. However, future developments that could lead to a positive rating action include:
-FFO adjusted gross leverage (including senior unsecured debt) consistently below 6.5x
-FFO fixed charge cover trending towards 2.0x
-EBITDA margin at or above 15% driven by operational leverage in the core UK business, as well as profitable international diversification leading to FCF margin sustainably above 3.5% of sales;
-Improving business profile achieved by the successful integration of e-commerce within the existing business, as well as successful international expansion, increasing the group's scale, and a proven track record of successful strategy implementation over the medium term under management.