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

Rating action

Scope Ratings GmbH (Scope) has affirmed its issuer rating of BB- and changed the Outlook to Negative from Stable on Germany health and beauty products company LR Global Holding GmbH. Scope has also affirmed the senior secured debt rating of BB-.

Rating rationale

The Outlook change reflects weakened credit metrics driven by the decrease in operating profitability in H1 2022 due to the Russia-Ukraine war, as well as the high inflationary environment and its effect on consumer behaviour. The issuance of a bond in 2021 increased the interest burden. Credit metrics, however, still align with the rating case as interest coverage has decreased but remains higher than 2.5x, the threshold for present ratings. Scope also expects that interest cover, the main rating-change driver, will weaken in 2022 due to decreasing operating profitability but will improve in 2023 when operating profitability recovers.

The issuer rating continues to reflect Scope’s business risk assessment, supported by the company’s good position as a manufacturer of premium non-durable consumer goods with health and lifestyle-related attributes. The goods are mostly produced in-house and are distributed through direct selling. The risks posed by LR’s small absolute size (about EUR 280m in sales estimated for 2022) are effectively mitigated by a favourable positioning in terms of both its products and its addressable direct selling market. LR’s good operating margins (EBITDA) of 9-11% further support the rating. Lack of diversification remains a constraint, as LR is active in one niche market and has high product concentration.

The business risk profile (assessed at BB-) benefits from high double-digit monthly revenue growth since 2019, which accelerated during the Covid-19 crisis. However, ongoing Russia-Ukraine war interfered this trend while we believe the shocking effect of the war on customer behaviour was temporary and the positive trend will resume. This is due to the long-term customer movement towards increased healthcare awareness and sustainable, quality-oriented fast-moving consumer goods with perceived health and nutritional benefits. LR almost solely relies on direct selling, involving a self-employed sales force with entrepreneurial incentivisation. Revenue generation within this referral model without a physical shop network thus depends on the size and motivation of the sales force to drive up demand from affluent and less price-sensitive consumers. With the exception of 2018 (an outlier for several reasons), profitability ranged between 6% and 12%, a good level for a retailer, although with relatively high volatility. The ability to achieve both significant sales growth and strong margin expansion is a function of the company’s comparatively low fixed-cost base as none of the sales force is employed by LR.

Scope believes lack of diversification is credit negative. LR is mostly exposed to a niche market and some of its product groups exhibit high concentration. Aloe vera products have been generating a large and growing share of total sales. This is partly mitigated by good customer and geographic diversification in relation to similarly sized peers, as the company is active in about 28 European countries and has made an entry into the South Korean market in 2021.

LR’s financial risk profile (assessed at BB-) has the same rating as its business risk profile. Q1 and Q2 2022 financial figures have been negatively affected by the Russia-Ukraine war while Scope expects that H2 2022 results will be stronger driven by easing of shocking effect on customers and the launch of Zeitgard pro product in September 2022. Overall, EBITDA will likely deteriorate significantly at end-2022 before improving again from next year. Scope-adjusted debt/EBITDA is expected to reach 4.4x at end-2022 before decreasing to 2.9x by 2024. Interest coverage, which is the main rating-change driver, is expected to decrease to 2.2x in 2022. The main reason behind this is the issuance of a high-yield EUR 125m bond in 2021 and deteriorating EBITDA, although EBITDA should improve starting next year and stay at around 2.7x in 2023. An additional support to LR’s financial risk profile is the company’s ability to generate free operating cash flow due to its very low maintenance capital expenditure and well-managed working capital. For example, the company has cancelled all unnecessary capital expenditure and signed sale-and-lease-back contract at a favourable interest rate for its headquarter in Ahlen, which has had a positive effect on free operating cash flow.

The issued bond has maintenance (leverage ratio equal or less than 4.5x), incurrence (in case of new debt issuance), and distribution covenants. Given financials of company, there is no breach, but the headroom is getting smaller according to our estimates this year.

LR’s liquidity is adequate, benefitting from a solid cash buffer of around EUR 30m in 2020-2022, positive free operating cash flow and immaterial short-term debt.

LR has decided to continue its operations in Russia despite of Russia-Ukraine war. Russian subsidiary additionally serves the Kazakhstan market. Given the company has big warehouse in Russia, the exit from Russian market would have negative economic consequences for LR (credit-negative ESG factor).

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Outlook is Negative, reflecting the uncertainty around the ability to maintain operating profitability in the challenging business environment and weakened credit metrics.

Positive trigger (i.e. back to stable outlook) if the challenging environment is less negative on the company’s profitability than expected, exemplified by cash interest cover moving back towards 3x or higher rather soon.

A negative rating action could be possible if the cash interest cover were sustained below 2.5x, which may result from deteriorated operating performance.

Long-term debt ratings

Scope set the bond’s hypothetical default year in 2024, simulating a scenario in which the company had issued the senior secured bond and proceeds had been used according to plan. The recovery analysis indicates ‘average’ recovery expectation, translating into the same rating as the issuer rating.

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, (General Corporate Rating Methodology, 15 July 2022; Consumer Products Rating Methdology, 4 November 2022; 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: Firuza Safarova, Analyst
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 23 October 2020. The Credit Ratings/Outlook were last updated on 9 December 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.