Moody’s has today affirmed the B1 long-term ratings of Dixons Retail plc, including its corporate family rating, probability of default rating and senior unsecured rating. The outlook is changed from stable to negative.
“The change in outlook to negative reflects mainly Moody’s view that metrics are likely to remain weakly-positioned versus the previous guidance for the current rating category at least over the medium term, notably for gross adjusted debt to remain close to 6.0x and for the adjusted EBITA/interest expense ratio to remain at least at 1.5x”, the rating agency said. As of October 2011, Moody’s estimates these metrics to be at 6.0x and 1.2x, respectively.
In the six months to October 2011, the slight weakening in the interest cover metric reflected the group’s weaker underlying operating profit, which was at GBP4.9 million in the period versus GBP14.6 million the prior year. In the first half year, profits were supported by lower losses in the core UK and Irish markets, but offset by weakness predominantly in some international markets (Greece and Italy), as well as in the e-commerce division.
“Although Moody’s recognises that the second half of the year is much more significant in terms of earnings, we nevertheless believe that in the current macroeconomic environment metrics are unlikely to improve in the near term, and may potentially weaken further.
“At this time Moody’s believes that Dixons should retain sufficient liquidity to repay its GBP160 million notes maturing in November 2012. As a result of the normal working capital requirements at that time of year and the bond repayment, the company has indicated that it might draw about GBP100 million from its Revolving Credit Facility (RCF) in November 2012 to repay the bond. In this case it would expect to repay the RCF drawing shortly afterwards when the outflow in working capital reverses.
“Our view of adequate liquidity is based on the assumption that operating performance will not deteriorate significantly in coming quarters and thereby put pressure on either cash flows or access to the RCF in terms of meeting financial covenants. Should there be any significant weakening in trading, we would likely review the rating positioning.”