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Rating action

Scope Ratings GmbH (Scope) has today affirmed Ceconomy AG’s issuer rating of BBB-/Stable. Scope has also affirmed the BBB- senior unsecured debt rating and the S-2 short-term debt rating.

Rating rationale

Ceconomy’s business risk profile is assessed at BBB-. The group saw its top line and EBITDA level improve over the course of the previous years despite Covid-19 related restrictions affecting the footfall in stores and a cyberattack in November 2021, which put slight pressure on the high selling season. Ceconomy has successfully continued its transition towards online sales, using the momentum linked to the pandemic, and continues to be Europe’s largest physical consumer electronics retailer in terms of size and market shares. However, competition is fierce and there is pressures on sales, linked to: i) the inflationary environment; and ii) supply chain bottlenecks, which Scope expects to weigh on the group’s growth in the coming year. Despite management’s ambition to maintain current margin levels and pass costs on to customers, Scope forecasts that the group’s Scope-adjusted EBITDA margin will stagnate at levels close to 4.5%, which is the main rating constraint. This margin pressure is despite the group’s efforts to cut operating costs and pool additional sources of income (i.e. its Services & Solutions and Marketplace services). Nonetheless, Scope expects profitability to be supported from an increased weight of Services & Solutions in both revenue and EBITDA benefiting from higher shop footfall. The Scope-adjusted EBITDA return on assets is also expected to deteriorate despite the group’s optimisation of shop operations and costs over the last year, due to an expected increase in inventory levels to maintain product availability.

Despite a difficult business year in terms of operations in the last years, Ceconomy has maintained good credit metrics in line with Scope’s forecasts. The group’s financial risk profile is assessed at BBB. The positive evolution of Scope-adjusted EBITDA has improved Scope-adjusted debt (SaD)/Scope-adjusted EBITDA to 1.5x in BY 2020/21 and funds from operations/SaD to 54%. Scope expects pressure on profitability to lead to a deterioration in all metrics, despite the forecasted absence of any significant debt issuance in the coming year (excluding EUR 151m of convertible bonds to be issued in BY 2021/22 mainly used to finance the transaction with Convergenta) due to the optimised financing structure, with limited loans and only a EUR 500m bond outstanding with a maturity in 2026. This deterioration is expected to weaken SaD/Scope-adjusted EBITDA towards levels slightly above 2.5x in the coming years. Interest cover is strong, supported by the absence of new debt issuance and the relatively low historical costs of debt (2.5% and below). Free operating cash flow will suffer the most as the group is likely to increase its inventory level (negatively impacting net working capital) and continues to have relatively high capex requirements to maintain its strategic deployment pace. Scope sees liquidity as adequate as Ceconomy has no debt repayments in the coming years and an undrawn revolving credit facility of EUR 1,060m.

Outlook and rating-change drivers

The Outlook is Stable and incorporates a decrease in Ceconomy’s Scope-adjusted EBITDA margin towards 4%. This translates into SaD/Scope-adjusted EBITDA surpassing 2.5x in BY 2021/22 before reverting to lower levels in the following years, as Scope expects a certain normalisation of the macro economic environment. The Outlook also assumes no M&A or significant debt issuance in the coming years.

A Positive rating action could be triggered by an improved business risk assessment, for example, through better operating margins than expected or by keeping SaD/Scope-adjusted EBITDA below 2x on a sustained basis.

A Negative rating action could result from sustainable SaD/Scope-adjusted EBITDA well above 2.5x following BY 2021/22, as it would indicate that the negative macro-conditions have deeper lasting effects than the ones that Scope is forecasting.

Long-term and short-term debt ratings

Scope affirms the BBB- debt rating for senior unsecured debt issued by Ceconomy and the S-2 short-term debt rating. Scope considers both internally and externally provided liquidity cover to be better than adequate. The group’s banking relationships and its standing in capital markets are deemed good.

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

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; Retail and Wholesale Rating Methodology, 27 April 2022) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Adrien Guerin, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 27 June 2017. The Credit Rating/Outlook was last updated on 24 June 2021.
The short-term Credit Rating was first released by Scope Ratings on 27 June 2017. The Credit Rating was last updated on 24 June 2021.
The senior unsecured debt Credit Rating was first released by Scope Ratings on 24 June 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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 does not, 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 other 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 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 GmbH at Lennéstraße 5 D-10785 Berlin.