OREANDA-NEWS. Fitch Ratings has affirmed Novartex SAS's (Vivarte) Long-term Issuer Default Rating (IDR) at 'CCC'. Fitch has also affirmed Vivarte SAS's EUR500m super senior debt ('New Money') at 'B-'/'RR2' and Novarte SAS's EUR780m reinstated debt at 'CC'/'RR6'.

The affirmation reflects Vivarte's compromised business model and execution risks associated with a sustainable turnaround amid a subdued consumer environment and high competitive pressures. Based on the first measures implemented by the new management, Fitch expects the group's profitability and funds from operations (FFO) generation to progressively improve while liquidity should remain adequate. However, Fitch does not expect any improvement in Vivarte's financial metrics would be meaningful enough to lead to a rating upgrade until 2018.

The current rating also reflects uncertainties around the request for a covenant waiver extension on the group's minimum EBITDA; however, as a mitigating factor we acknowledge the new management's ability at reacting swiftly to protect the group's liquidity and to put in place a comprehensive turnaround plan aimed at restoring profitability to a more normalised level by 2018.

KEY RATING DRIVERS
Weak Credit Metrics
Fitch projects key financial credit metrics to remain weak with stable FFO fixed charge cover at approximately1.2x and FFO adjusted gross leverage above 8.0x over the next three years (our leverage metrics include adjustments for operating leases and EUR100m cash considered not readily available for debt repayments). The positive effect of growing FFO will be partially offset by the negative impact of accumulating high PIK interests on debt.

Waiver Request on EBITDA Covenant
Vivarte's management has asked lenders to extend the LTM EBITDA covenant holiday to the next testing period of February 2016. The degree of uncertainty around the lenders' acceptance of such extension is embedded in the current 'CCC' IDR. We note that the lenders are also the shareholders of the group and that the set of covenants had been put in place based on the former management's business plan, which had under-estimated the group's distress. Fitch sees the first results of the new strategic plan as encouraging, in particular the sound performance of the mass market apparel segment (mainly La Halle Apparel) in 1QFY16 (financial year ending August 2016).

Evolving Business Model
Fitch positively views the turnaround plan implemented by new management from mid-FY15. Key measures comprise the restructuring of the loss-making banners (notably more than 230 store closures mainly at La Halle Apparel), competitive repositioning on products and prices, store network optimisation and e-commerce development, as well as the streamlining of its cost structure. Fitch expects this plan to enable the group to restore both sales growth from FY16 and EBITDA to near FY14 levels (EUR170m) by FY17, despite the group's diminished scale.

Still Difficult Market Environment
Fitch views Vivarte's concentration in the French market as a constraint to the rating. Our rating case integrates the assumption that the French apparel and footwear market growth will remain subdued due to a fragile consumer environment and continuously fierce competition, implying recurring strong price pressure. Furthermore, we expect abnormal weather conditions such as the exceptionally warm autumn 2015 to keep on creating additional market disturbances as this may lead retailers to undertake deep discounting to keep their inventories at a reasonable level.

Adequate Liquidity
Fitch believes Vivarte will have sufficient liquidity to support the group's comprehensive turnaround plan over the next three years. In FY15 management drastically reduced the main sources of cash drain such as unprofitable stores, capex and obsolete inventories. This should enable the group to fully dedicate its liquidity resources to the turnaround plan.

Fitch projects Vivarte's FCF to remain deeply negative in FY16 at approximately minus EUR220m as unprofitable operations are being discontinued. However, we expect the outflow to drop to EUR45m-EUR50m per year in FY17 and FY18. These outflows should be well covered by readily available cash of EUR427m at end-FY15, while Vivarte benefits from bullet debt maturities. Fitch also assumes that the EUR147.4m letter of credit lines used for intra-year working capital funding and renewed for one year in October 2015 will be further renewed thereafter.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Like-for-like sales growth to return to positive low single-digits in FY16
- Gradual restoration of group's EBITDA margins towards 7.5% to slightly above FY14 level.
- Negative cash impact of group restructuring mainly in FY16.
- Average capex around 4.5% of sales over the next three years
- Negative, although improving, FCF generation over the next three years

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating actions include:
- Evidence of improvements to the business model and successful execution of the turnaround strategy by defending its market share while returning to like-for-like sales growth and improving profitability, particularly in the mass market channel. This is a key consideration for an upgrade.
- Reducing financial risks, evidenced by at least neutral FCF generation and FFO fixed charge cover above 1.3x
- FFO adjusted gross leverage below 8.0x

Negative: Future developments that could lead to negative rating action include:
- Inability to improve 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.