The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings has placed the BBB- rating of Fnac Darty S.A. under review for possible downgrade. The S-2 short-term debt rating and the BBB- senior unsecured debt rating have also been placed under review for possible downgrade.

Rating rationale

The 2020 year is expected to be a difficult one for most non-food retailers, with the forced closure of most physical shops selling products deemed non-essential under the French government’s efforts to contain Covid-19. As a result, Fnac Darty, which sells white and brown goods, has had limited bricks-and-mortar activity since the beginning March 2020. A very gradual relaxation of lockdowns in France (representing around 80% of Fnac Darty’s total sales) is expected from 11 May 2020. Even so, at least two months of revenue will have already been lost by bricks-and-mortar businesses. Fnac Darty’s omnichannel has somewhat dampened this effect, with close to 20% of its sales generated online, thereby avoiding a total absence of revenues since lockdowns were instituted.

The placement of Fnac Darty’s rating under review for downgrade accounts for the following points. First, despite an official announcement to relax lockdown measures from 11 May, many shops are still likely to remain closed. Following the example of Germany, France may impose a limit on the area open to customers for each shop. Fnac Darty’s activities require significant floorspace, with its combination of books and brown goods (Fnac) and white goods (Darty). Fnac Darty may therefore face closures for a longer period than other retailers. Second, customer behaviour may change despite the relaxation of measures. It remains to be seen whether households will resume buying discretionary goods at the same level as before the pandemic. Open yet close to empty shops are possible. Third, Fnac Darty has not paid its rent for the last two months, reducing operating expenses slightly. The duration of the grace period will be decided on case-by-case basis. And lastly, the group has obtained a EUR 500m loan granted by a consortium of French banks, with 70% guaranteed by the French state. The proceeds will be used to manage seasonal effects and provide a general liquidity buffer (see below). However, overall debt has also increased significantly.

In an environment marked by significant uncertainty, with the only certainties being a huge drop in revenue and an increase in debt, credit metrics are forecasted to deteriorate for 2020. The key question is the ultimate impact of Covid-19 at YE 2021. Management expects a recovery to past years’ levels, namely previous Q4 sales, bolstered by major commercial events including Black Friday, Cyber Monday and Christmas.

Outlook and rating-change drivers

Scope aims to resolve the review as soon as possible, within three months at the latest, depending on further developments. This is contingent on a timely end to the crisis and sufficient visibility. If the pandemic’s effects are confined to 2020, Scope might consider the current rating to remain valid. If effects are seen beyond the current business year, combined with a Scope-adjusted debt/EBITDA ratio of above 4x on a sustained basis, a downgrade of at least one notch might be triggered.  

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology used for this rating(s) and/or rating outlook(s) (Corporate Rating Methodology, 26 February 2020) is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on www.Scoperatings.com/methodologies/ ESG factors in ratings.

Solicitation, sources and quality of information
The rating was requested by the rated entity or its agents.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst: Adrien Guerin, Analyst
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 18 February 2019. The ratings/outlooks were last updated on 13 December 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

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