Scope Ratings upgrades Karlie’s corporate rating from SD to B-; Outlook Stable

Scope raises Germany-based Karlie Group GmbH (Karlie) to B- from Selective Default (SD). The rating action follows the revision of the company’s creditworthiness following the restructuring of Karlie’s EUR 10.1m senior unsecured corporate bond.

Scope had lowered Karlie’s corporate rating to Selective Default on 31 May 2016 as a result of the company’s bond restructuring, two years ahead of the bond’s maturity in June 2018. This included a reduction of the coupon, which is defined as a Selective Default under Scope’s corporate rating methodology.

Key rating drivers

Early bond restructuring to result in higher operational flexibility and reduced refinancing risks. From Scope’s perspective, both the bondholders’ agreement on a retrospective coupon reduction from 6.75% to 5.0% and the prolongation of the bond’s maturity from June 2018 to June 2021 constitute a debt relief that improves the company’s financial risk profile.

On the one hand, the prolongation of the senior unsecured corporate bond by three years to June 2021 is seen as a relief for the short- and medium-term refinancing risks of the group. It not only expands Karlie’s room for manoeuvre in its operational restructuring but also increases the likelihood for continued bank financing on Karlie’s committed credit lines, which expire in December 2017. Scope believes that the company’s financing banks are likely to maintain their commitment after 2017 with the deferral of refinancing needs to 2021, in conjunction with the subordination of Perusa Partners GmbH’s – the 100% shareholder in Karlie – share of the corporate bond (EUR 3.1m). However, further bank financing will remain strongly dependent on the company’s progress in its operational turnaround. On the other hand, the reduced interest rate on the corporate bond reduces overall interest payments by around 20%, thereby slightly improving the expected interest coverage over the next few years.

Rating remains largely constrained by weak financial risk profile and turnaround success. Karlie’s rating continues to be constrained by its weak financial risk profile. While Scope believes that the company is on a good track to return to positive results thanks to an adjustment of personnel costs, IT integration and improved logistics, key credit metrics remain weak. The turnaround process will continue to take its toll on 2016 results, leaving EBITDA cash interest coverage below 1.0x. It will be crucial for Karlie to advance in its operational performance by 2017, when the company is required to fully cover its interest charges – measured as EBITDA interest coverage of over 1.0x – from its operating business, which is reflected in Scope’s rating case. Nevertheless, the company’s leverage is expected to remain high with a Scope-adjusted debt/EBITDA of 7.6x in 2017.

Bond restructuring improves liquidity. Karlie’s liquidity and operating cash flows are likely to remain insufficient to redeem outstanding debt maturities over the next two years, thereby requiring the company to refinance or extend its bank loans by YE 2017. However, Karlie’s early bond restructuring has eased the pressure on its balance sheet and refinancing risks over the next 18 months. The refinancing of the EUR 19m credit lines by YE 2017 with two bank consortia has become more likely now that the refinancing of the EUR 10.1m corporate bond has been pushed back to 2021.

No rating impact from parent support. Scope highlights the sole shareholder’s financial commitment to Karlie, with the continuous financial support in terms of equity injections and shareholder loans. While the shareholder’s willingness is considered strong, Scope does not have enough insight regarding the shareholder’s financial capacity to provide ongoing support if Karlie’s operational turnaround is delayed much longer with further operational losses.

Stable Outlook. Scope has become more conservative concerning the speed of Karlie’s operating turnaround. For a Positive Outlook, Scope would need to see that Karlie’s operational performance is gaining pace. While the low B- rating reflects the fact that the company does not face imminent risks of further financial restructuring measures, a positive rating action would require a sustainable improvement of the company’s EBITDA interest coverage above 1.3x. A negative rating action would be needed if the company’s expected revenue growth and cost coverage continue to lag, which might require further external financing measures or threaten the company’s efforts to extent its credit lines beyond December 2017.

Regulatory and legal disclosures

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund, Dr. Sven Janssen.
The rating analysis has been prepared by Sebastian Zank, Lead Analyst
Responsible for approving the rating: Olaf Tölke, Committee Chair

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
• Prospectus
• Website of the rated entity
• Annual financial statements
• Valuation reports, other opinions
• Annual reports/semi-annual reports of the rated entity
• Current performance record
• Detailed information provided on request
• Data provided by external data providers
• Interview with the rated entity
• External market reports
• Press reports / other public information

Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodology applicable for this rating (Corporate Rating Methodology) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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Rating issued by
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