Russian transaction

Ceconomy has acquired a 15% stake in M.video, the leading national consumer electronics retailer, for a price of EUR 258m which will be funded via cash (Ceconomy held EUR 863m of balance sheet cash at 31 March 2018) and has also announced the divestiture of its loss-making Russian store portfolio to M.video. While the transaction will negatively impact key credit metrics, its dimensions will be somewhat counterbalanced by the removal of its deconsolidated Russian losses, as well as lower leasing obligations in future. Scope believes that the likely resulting impact in fiscal 2018 will still be in line with the present ratings. Scope’s initial cautious view on reported group EBITDA for fiscal 2018 (EUR 688m), which has now been adjusted towards EUR 730m, is a further mitigating factor. Based on the above, Scope believes that key credit metrics for fiscal 2018 are likely to be as follows:

• Scope-adjusted debt (SaD) to Scope-adjusted EBITDA of 2.2x (2.2x in fiscal 2017, Scope expected 2.1x previously)
   
• Funds from operations (FFO) to SaD of 35% (36% in FY2017, Scope expected 38% previously)

For fiscal 2019 the envisaged capital increase (Scope has assumed a cash inflow of about EUR 200m, although execution depends on supportive capital markets in the next couple of months) is likely to influence Ceconomy’s key credit metrics positively and enable continued deleveraging in the absence of further M&A transactions – which Scope does not foresee. The rating agency does not anticipate a negative rating action if the capital increase cannot be executed until the end of the year, as it believes that key credit metrics can improve even without the increase in fiscal 2019. Overall, Scope believes that Ceconomy’s financial performance projected for the next two years will be in line with its ratio guideline for the present ratings, namely an FFO-to-SaD ratio of 35-40% and leverage of below 2.5x.

Financial policy – rating implications

Scope views the management of Ceconomy’s decision to consider a sizeable equity issuance of 10% as a strong ratings commitment. This commitment is in line with the agency’s analytical conclusions, built into the ratings, regarding Cecomony’s conservative financial policy. It also reflects Scope’s perception of management’s prudent support for the company’s investment grade rating against the backdrop of consolidation in the European consumer electronics market.

This publication does not constitute a credit rating action. For the official credit rating action release click here. On 27 June 2017, Scope assigned Ceconomy AG an issuer rating of BBB-. The short-term rating is S-2. The Outlook is Stable.