Vedes’ B+ corporate rating benefits from the group’s credit-supportive business risk profile, through the limited cyclicality of the German toy industry, as well as a solid market position within its core market, Germany. The ratings are constrained by Vedes’ modest key credit ratios, including limited cash generation, itself caused by integration measures during the acquisition of Hoffmann Group.

The group’s sectoral exposure to the toy and leisure industry supports Vedes’ business risk profile. The niche market for toys is characterised by a high level of stability, in Scope’s view. Scope observes a cyclically independent growth of 3.0% p.a. (CAGR 2005-2015) in the German toy market.

Vedes is considered to be a leading trade organisation in the market for toys & games in Europe. The group enjoyed a large market share of almost 18% in 2015 (measured as external sales) in its core market, Germany. Nevertheless, due to the fast-growing online business mainly through e-commerce pure players, Vedes customers are subject to an intense competition. In Scope’s opinion, Vedes’ limited exposure to the increasing e-commerce segment will ultimately result in a loss of market share and will heavily constrain its market position in the future.

Scope views Vedes’ overall diversification as limited and constraining for its business risk profile. The group is only active in the European market and strongly dependent on Germany (above 80% of wholesale revenues in 2015). Vedes’ profitability is in line with its business risk profile. The group’s adjusted EBITDA margin declined to slightly below 5% in 2015 due to integration costs, the disclosure of existing mandates and the harmonization of IT and infrastructure logistics in the course of the Hoffmann acquisition. Scope expects the Group to report an improving EBITDA compared to 2015. This reflects Scope’s expectations of a slight increase in the share of business stemming from high-margin central-settlement segment. In addition, as recent integration measures bear fruit, Scope forecasts a gradually easing margin development for Vedes’ wholesale business.

Scope views the financial risk profile of Vedes as less favourable than its business risk profile. Given Scope’s expectations of gradually improving earnings (EBITDA) and no additional external financial debt, the agency expects the group’s leverage ratios to decrease slightly, i.e. achieve a Scope-adjusted debt (‘SaD’)/EBITDA of 5.7x and a Scope-adjusted FFO/Scope-adjusted debt of 10.2% but still remain at high levels in 2016. Vedes reported negative free operating cash flows during the year 2015 amounting to EUR 5.6m. In the base case, Scope expects Vedes’ free operating cash generation to break even in 2017. This is based upon Scope’s assumption of operating recovery and slowing capex expenditures as result of completed integration measures (mainly including IT integration and expanding/improving the operational plant in Lotte). Scope views Vedes’ liquidity as solid and supportive for its financial risk profile. This is mainly based on the group’s flat maturity profile in the next two years. Vedes is not facing material refinancing risks until 2019 where its EUR 20m corporate bond matures.

Bond

The B+ corporate bond rating reflects Vedes’ B+ CICR and ‘average’ potential recovery prospects (30% to 50%). The group’s outstanding debt (mainly credit facilities, finance leases and accounts payables) is widely secured through pledges over receivables and inventories (blanket assignment of receivables & inventories) and ranks pari passu with its senior secured bond. Scope views the recoverability and processability of the bond’s security package as limited in a default scenario comprising a pledge over the rights to Vedes’ registered trademark ‘VEDES’.

Outlook

The Outlook is Stable and reflects Scope’s expectation that Vedes should demonstrate steadily recovering EBITDA margins despite increasing pressure from e-commerce pure players. From now on, Scope’s rating incorporates positive funds from operations, resulting in break-even free operating cash flow generation in 2017 and does not reflect debt-financed acquisitions.

Scope would consider a negative rating action if the group’s leverage in terms of SaD/EBITDA or FFO/SaD deteriorated to levels of about > 7.0x and < 5% respectively or liquidity would deteriorate significantly, triggered by a slower-than-expected operating recovery and substantial negative funds from operations.

Given the competitiveness of the environment Scope considers a rating upside as highly remote. 

Download the detailed rating report (in German): Vedes AG Rating Report.

Regulatory 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, Chief Executive Officer: Torsten Hinrichs, Dr Stefan Bund, Dr Sven Janssen.
Rating prepared by Rating committee responsible for approval of the rating
Timo Schilz, Lead Analyst Olaf Toelke, Committee Chair
The rating concerns an entity, which was evaluated for the first time by Scope Ratings AG.
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
- Website of the rated entity
- Detailed information provided on request
- Valuation reports, other opinions 
- Data provided by external data providers
- Current performance record 
- External market reports
- Audited annual financial statements
- 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.

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.

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.
 
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