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Rating action

Scope Ratings GmbH (Scope) has today affirmed German health and beauty products retailer LR Global Holding GmbH’s issuer rating of BB- and changed the Outlook to Stable from Negative. Scope has also affirmed the company’s senior secured debt rating at BB-.

Rating rationale

The rating action reflects Scope’s increased confidence that the effects the Russia-Ukraine war and other macroeconomic events are over for LR. While these events depressed sales and EBITDA in 2022, LR’s operating performance has improved since then. Scope expects credit metrics to bottom out for the full year 2023 and improve thereafter. In 2023, the company’s interest coverage ratio is expected to remain higher than 2.5x, which is the downside threshold for present ratings.

The issuer rating continues to reflect Scope’s business risk assessment, supported by the company’s good position as a manufacturer and distributor of premium non-durable consumer goods with health and lifestyle attributes. LR mostly produces the goods it sells itself and then distributes them through direct selling. The risks posed by LR’s small absolute size (under EUR 300m of annual sales) are effectively mitigated by a favourable positioning both on the product side and regarding its addressable direct-selling market, with limited-to-no competition on the point of sale. LR’s comparatively good operating margins (11% EBITDA margin in H1 2023) provide additional rating support. Lack of diversification continues to hinder credit quality, as LR is active in one niche market and has relatively high product concentration.

The business risk profile (assessed at BB-) has benefited from a strong revenue growth since 2019, helped by an increase during the Covid-19 crisis. While the ongoing Russia-Ukraine war hampered growth for a few quarters, demand picked up again in Q4 2022. Revenue growth in H1 2023 was about 7% and EBITDA grew by about 12% YoY. LR continues to follow the customer appetite for increased healthcare exposure by selecting a range of sustainable, quality-oriented consumer goods with some exclusivity appeal (direct selling, product not available elsewhere), led by innovations such as the recently offered Zeitgard product range. Customers are generally affluent and therefore less price-sensitive than traditional retail consumers. Scope considers that input cost inflation can be fully compensated through price increases. LR’s profitability has ranged between 8% and 13% in the last four years and showed resilience in the crisis years of 2020-2022. Its level reflects a mix between retail and consumer goods peers as LR is exposed to these two sectors. Scope’s reasoning in positioning the company in the retail segment is that LR’s unique distribution channel is more important to its credit quality than its profile as a producer of consumer goods. LR’s comparatively high margins in a pure retail context is also a function (besides customers’ low price sensitivity) of the company’s comparatively low fixed-cost base as LR’s sales force is mostly self-employed.

Diversification is not supportive of the ratings as the direct selling market is a niche market and thus more vulnerable to any shocks, including reputational shocks. In addition, there is a relatively high concentration on certain product groups. Aloe vera products generate about 40% of total sales, a share that is increasing (33% in 2016). This is partly mitigated by good customer and geographic diversification as the company is active in 32 countries and has recently made an entry into the South Korean market, comparing well to similarly-sized peers. LR’s exposure to the crisis countries Ukraine and Russia has been greatly reduced over recent quarters, to under 10%.

LR’s financial risk profile (assessed at BB-) is at the same level as its business risk profile. Credit metrics are very likely to stabilise from 2024 after a phase of operational weakness in H1 2022 induced by the Russia-Ukraine war. Both sales and EBITDA growth were quite strong by H1 2023. This was chiefly generated in the company’s Western European segment (up 16% YoY), while the Central and Eastern European division saw negative growth in H1 2023 (down 4.8% YoY). H2 2023 might additionally benefit from price increases. Scope projects 2023 EBITDA to increase by 7% YoY, as the second half of a year is traditionally also supported by the Christmas business. Scope’s projections are thus more optimistic than those of management, which assumes stable earnings for the full year. Scope expects Scope-adjusted debt/EBITDA to improve to 3.9x in 2023, equivalent to a slight deleveraging from the end-2022 level of 4.2x (assuming 50% of cash-netting against debt). The interest coverage ratio, which is the main credit ratio in the context of the rating, is expected to decrease to 2.6x in 2023, but remains commensurate with the current rating. In last year’s review, Scope expected that in 2022, the interest coverage ratio would decrease to the point of triggering a downgrade, which was too conservative, based on an EBITDA projection of EUR 26m (actual: EUR 31m).

Scope believes that LR’s liquidity is adequate as it benefits from a solid cash buffer of around EUR 30m annually, positive free operating cash flow and immaterial short-term debt. While the company’s senior secured EUR 125m bond needs to be paid back in 2025, Scope understands that management will start its refinancing strategy shortly.

Outlook and rating-change drivers

The Outlook is Stable, reflecting Scope’s expectation that credit metrics will stabilise after 2024 and that further macroeconomic/geopolitical crisis will not harm the business environment further.

A positive rating action could be warranted if the company continued to exhibit significant sales growth even in challenging market conditions. In addition, cash interest cover of above 4x on a sustained basis could be supportive, which may be driven by extended/continued acceleration of sales and operating performance.

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

Long-term debt ratings

Scope set the bond’s hypothetical default year to 2025. The recovery analysis is based on a distressed enterprise value of EUR 94m. While the ‘above-average’ recovery expectation (50%-70%) paves the way for an up-notching of the issuer rating, Scope has decided to keep the senior secured bond rating the same as the issuer rating as the calculated recovery rate is at the very bottom of the ‘above-average’ range. 

The rating was prepared with the application of Scope’s Consumer Products Rating Methodology, 4 November 2022. The application of the Consumer Products Rating Methodology, 3 November 2023, does not have an impact on the 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 Outlook, (General Corporate Rating Methodology, 16 October  2023; Consumer Products Rating Methodology, 3 November 2023; Retail and Wholesale Rating Methodology, 27 April 2023), 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.
 
Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Olaf Tölke, Managing Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 23 October 2020. The Credit Ratings/Outlook were last updated on 8 November 2022.
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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