Key rating drivers

Scope regards VEDES B+ issuer rating to be supported by the company’s market position as the leading German trade organisation in the acyclical toy and leisure industry. The company is able to defend its market share of more than 15% in its core market of Germany, which has been strengthened further through the integration of Hoffmann Spielwaren. Scope deems the company to have already exploited its margin potential, with a satisfactory EBITDAR margin of above 6% and an EBITDA margin of above 3%. Scope believes VEDES’s market share is however, continuously challenged by the fast growth of online businesses, mainly through e-commerce pure players, where the company’s exposure still lags behind the overall industry. Moreover, the company’s limited diversification across major European markets and still-high dependence on its German core market are, from Scope’s standpoint, the major credit weaknesses of VEDES's business risk profile.

VEDES’s issuer rating remains largely constrained by the weaker financial risk profile. While Scope highlights the significant improvement in this regard (4.6x leverage at YE 2016 vs 5.8x at YE 2014; 2.7x EBITDA interest coverage in 2016 vs 1.8x in 2014; return to positive operating cash flows in 2016 at EUR 2.7m), key credit metrics still only equate to a B financial risk profile. The company’s adjusted debt position of EUR 41m mainly comprises the EUR 20m senior secured corporate bond and a significant exposure to operating lease contracts with an assumed NPV of roughly EUR 22m. Scope believes VEDES has already reached its potential in terms of margin, of between 6-7% for a wholesale company with limited topline growth potential over the next few years. Hence, Scope believes the company has less room to deleverage below 4x or reach an EBITDA interest coverage of above 3x.

Liquidity and debt repayments

Scope regards VEDES‘s liquidity profile to be adequate over the next 1.5 years. Upcoming debt maturities can comfortably be covered by accessible liquidity sources, through its limited exposure to short-term debt in 2017 and 2018, a cash buffer of EUR 3.8m at YE 2016, low capex needs, and access to undrawn credit and factoring lines. However, the company’s major debt position, the EUR 20m senior secured corporate bond, requires external refinancing by June 2019. Scope understands that the company is actively looking for refinancing options, which could also include early refinancing.

Bond

The B+ rating for VEDES’s EUR 20m senior secured corporate bond prior to the rating withdrawal reflected the underlying B+ issuer rating and Scope’s expectations of an ‘average’ potential recovery. While the company’s debt positions such as credit facilities, finance leases and accounts payables are widely secured through pledges over receivables and inventories (blanket assignment of receivables and inventory), the EUR 20m corporate bond is secured by a pledge over rights to the registered trademark, 'VEDES'. Scope views the recoverability of and ability to process the corporate bond’s security package in a default scenario as limited.

Outlook

Given the withdrawal of VEDES’s ratings Scope does not assign a rating outlook.

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) and Dr Stefan Bund.

The rating analysis has been prepared by Sebastian Zank, Lead Analyst
Responsible for approving the rating: Olaf Tölke, Committee Chair

Rating history | issuer rating
Date                                       Rating Action           Rating
15 December 2016                New                         B+/Stable

Rating history | senior secured corporate bond (EUR 20m; 2014/19)
Date                                       Rating Action            Rating
15 December 2016                New                          B+/Stable

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. The issuer participated the rating process.

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.

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 (Corporates) 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.

Conditions of use / exclusion of liability
© 2017 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings AG, Scope Analysis GmbH, Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope cannot, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided “as is” without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or otherwise damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party, as opinions on relative credit risk and not as a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings AG at Lennéstraße 5 D-10785 Berlin.

Rating issued by
Scope Ratings AG, Lennéstrasse 5, 10785 Berlin