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

Rating action

Scope Ratings GmbH (Scope) has today affirmed LR Global Holding GmbH’s issuer rating of BB- and changed the Outlook to Negative from Stable. Scope has also affirmed the company’s senior secured debt rating of BB-. Simultaneously, Scope has issued a BB-/Negative issuer rating and a BB- senior secured debt rating on LR Health & Beauty SE, the new parent company and bond issuing entity of the LR Group (LR). Subsequently, Scope has withdrawn all ratings on LR Global Holding GmbH for business reasons.

The Outlook change to Negative from Stable reflects a slower recovery in EBITDA and higher interest expenses compared to Scope’s forecasts made last year, leading to a deterioration in EBITDA interest cover below 2.5x and a Scope-adjusted debt/EBITDA persistently above 4.0x.

The issuance of an issuer rating and a senior secured debt rating for the entity LR Health & Beauty SE is driven by its status as the new parent of the LR Group and consolidating entity for the group since 2024. Also, the refinancing transaction in 2024 resulted in the prepayment of the of the senior secured bond (2021/2025) issued by LR Global Holding GmbH and the issuance of a new bond (2024/2028) by its parent LR Health & Beauty SE, which is now the bond issuing entity of the group. As a result, the ratings on LR Global Holding GmbH have been replaced by those on LR Health & Beauty SE.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BB- (unchanged). The business risk profile is supported by LR’s good position in the European direct selling niche market, including its home market in Germany. With revenues of EUR 275m in 2023 the company is rather small in the context of the overall market for nutritional supplements and cosmetic products. Competition from products sold via other retail channels (e.g. physical retail stores, e-commerce, doctors) remains elevated. Nevertheless, LR’s business model, which consists in the production and direct sale of premium nutritional and beauty products through a network of independent sales representatives - is not entirely driven by trends in consumer demand, but it also relies on the ability to continuously recruit and retain sales partners. The exposure to the single direct selling distribution channel makes the company more vulnerable to any shock, including reputational, and limits its addressable market. Despite operating in product categories with low cyclicality, Scope notes a relatively high concentration of sales on certain product groups, notably the aloe vera products; however, several product launches in most recent years are gradually reducing such reliance. Asset risk also is a constraint, since the company’s production facilities are located at the headquarter in Ahlen, from where all subsidiaries are supplied and a significant share of products are manufactured and/or packaged. Diversification is somewhat balanced by the customer granularity and wide geographical presence throughout Europe and South Korea, despite nearly 45% of sales coming from the DACH region.

LR managed to grow its sales by low-to-mid single digit in 2023 and during the first half of 2024, despite soft consumer demand in Europe, outperforming even larger direct selling peers. The development was bolstered by several new product launches in 2023, including the introduction of subscription-based health products, and by increasing the focus on the distribution network. Innovations at LR are driven by moderate but consistent R&D investment, maintained at approximately 1% of revenues. On the other hand, advertising is entirely managed by sales representatives, which somewhat limits the brand’s broader market resonance but provides exclusivity (product not available elsewhere).

Profitability supports LR’s business risk profile. The EBITDA margin* has ranged between 9% and 13% over the past five years, demonstrating resilience even during periods of high inflation and the pandemic. Since the start of the ongoing conflict in Ukraine in 2022, EBITDA has stabilised at approximately EUR 31m annually (revenue exposure to Russia and Ukraine has since been reduced to the high single digits percentage points). We anticipate that this level will continue through 2024, improving to around EUR 34m in 2025 despite persistent soft consumer demand. This growth will be driven by the expansion of subscription-based products, the launch of new products, and a moderate recovery in Eastern European markets. The EBITDA margin remained stable at around 11.5% in 2023. Looking ahead, Scope projects a moderate increase in the EBITDA margin to approximately 12%, supported by declining raw material prices and efficiencies from the completion of investment projects in a new logistics center and a digital platform for sales partners (both projects went live in 2024).

Financial risk profile: B+ (revised from BB-). The financial risk profile assessment primarily reflects the deterioration of EBITDA interest cover below 2.5x, which was the existing negative rating trigger. The metric was negatively impacted by higher interests paid of around EUR 13m in 2023, up from EUR 9m in 2022. This was driven by the increase of the Euribor reference rate applied to the EUR 125m floating rate bond, which represents over 80% of gross debt as of June 2024 (this also includes a EUR 8m of fixed-rate amortising loan, around EUR 18m of lease liabilities and a EUR 4m shareholder loan obtained in Q1 2024). With Euribor rates peaking in H1 2024, Scope projects interest expenses - including interests on leases and other loans - to rise to close to EUR 17m for the full year 2024, but gradually decline afterward on decreasing reference rates. The bond refinancing in Q1 2024 resulted in a small increase of the nominal value by EUR 5m and a slightly higher applicable margin of 7.5% (compared to the previous 7.25%), hence leading to only minimal impact to interests. Scope sees EBITDA interest cover remaining below 2.5x based on the assumption of slow EBITDA recovery and only a moderate reduction in reference interest rates.

Scope-adjusted debt/EBITDA rose to 4.5x in 2023, up from 4.2x in 2022, due to stable EBITDA and reduced cash (Scope continues to apply a 50% cash haircut). Contrary to earlier projections of a significant improvement starting in 2024, Scope now expects leverage to remain stable in 2024 and to stay at or above 4.0x in the medium term. This is despite a slight decrease in Scope-adjusted debt owing to gradually increasing cash reserves. Thanks to its relatively light asset structure with capex averaging around 2% of revenues over the past few years, LR usually generates positive free operating cash flow (FOCF). Nevertheless, higher tax payments and large working capital needs, primarily driven by inventory build-up due to challenges in the logistic market, led to negative Scope-adjusted FOCF of EUR -12m in 2023. With a gradual working capital normalisation, Scope expects FOCF/debt to again become positive from 2025, although remaining constrained at below 5% of debt. Dividend payments are restricted by the terms of the bond.

Liquidity: adequate (unchanged). Liquidity benefits from a cash buffer of around EUR 13m as of June 2024, usually positive FOCF and immaterial short-term debt. The early refinancing in 2024 of the EUR 125m senior secured bond maturing in 2025 with a new EUR 130m senior secured bond expiring in March 2028 alleviated liquidity concerns over the forecasted horizon. Nevertheless, the maturity wall in 2028 could lead to increasing refinancing risk over time.

The new bond requires quarterly compliance tests with financial covenants on leverage ratio (net debt/EBITDA) and pre-IFRS16 leverage ratio. The buffer to the 5.0x leverage bond covenant was a moderate 13% as of June 2024, while it was considerably higher for the 6.0x pre-IFRS leverage covenant. Scope estimates that the buffer to the leverage covenant will gradually improve to well above 20% over time, even though the leverage covenant requirement tightens to 4.5x in 2026.

Supplementary rating drivers: credit-neutral. Scope has made no adjustments related to financial policy, peer group considerations, parent support, or governance and structure.

Outlook and rating sensitivities

The Negative Outlook reflects the observed deterioration in profitability in recent years, which has put pressure on credit metrics that are not commensurate with the previously established financial risk profile. Scope expects a slow recovery in EBITDA from the trough in 2024E based on soft consumer demand, and only a moderate reduction in interest expense going forward. This could result in leverage remaining above 4.0x and EBITDA interest cover below 2.5x over the medium term. In addition, the outlook assumes that LR remains in compliance with its leverage financial covenants and does not assume any further business disruptions due to the current geopolitical tensions in Ukraine.

The upside scenario for the ratings and Outlook is:

• Interest cover recovering at or above 2.5x on a sustained basis

The downside scenario for the ratings and Outlook is:

• Interest cover remaining below 2.5x on a sustained basis

Debt ratings

Scope has affirmed the senior secured bond rating of BB- on LR Global Holding GmbH and subsequently withdrawn it for business reasons. At the same time, Scope has assigned a senior secured debt rating of BB-to LR Health & Beauty SE, in line with its issuer rating.

On February 19, 2024, LR Health & Beauty SE placed a senior secured bond with a nominal issue volume of EUR 130m and issue proceeds of approximately EUR 125m. These proceeds were be used to refinance, on 11 March, 2024, the existing senior secured bond of LR Global Holding GmbH (ISIN NO0010894850), which was due to expire in 2025. Like the previous one, the new bond is issued in the so-called "Nordic bond format" under Swedish law and with the involvement of Nordic Trustee & Agency AB as trustee. The bond is traded on the Open Market of the Frankfurt Stock Exchange (ISIN: NO0013149658). The terms of the corporate bond require a listing on the regulated market of Nasdaq Stockholm by March 2025.

The recovery analysis is based on a distressed enterprise value of EUR 97m in a hypothetical default scenario in 2026. While the ‘above-average’ recovery expectation (50-70%) paves the way for an up-notching of the issuer rating, Scope refrains from upnotching the debt rating due to LR’s asset-light business model and the material uncertainty regarding its asset value in a hypothetical default scenario, which may be driven by increasing competition and/or a loss of confidence in the business and resulting departure of sales partners.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

LR Health & Beauty SE

Issuer rating: BB-/Negative, new

Senior secured debt rating: BB-, new

LR Global Holding GmbH

Issuer rating: BB-/Negative, Outlook change and subsequent withdrawal

Senior secured debt rating: BB-, affirmation and subsequent withdrawal

The rating was prepared following Scope’s Consumer Products Rating Methodology, 3 November 2023. The application of the Consumer Products Rating Methodology, 31 October 2024, does not have an impact on the rating.

*All credit metrics refer to Scope-adjusted figures.

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, 31 October 2024), 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 these 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 and Outlook 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: Eugenio Piliego, Senior Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The LR Global Holding GmbH's Credit Ratings/Outlook were first released by Scope Ratings on 23 October 2020. The Credit Ratings/Outlook were last updated on 6 November 2023.
The LR Health & Beauty SE's Credit Ratings/Outlook were first released by Scope Ratings on 4 November 2024.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis 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.