Fitch affirms Sodexo's IDR, senior unsecured ratings at BBB+; outlook stable

Andrew Rogers

CHICAGO , August 15, 2012 (press release) –
Fitch Ratings has affirmed Sodexo SA's (Sodexo) Long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'BBB+'. The Outlook is Stable.

The affirmation reflects the company's steady performance despite difficult macroeconomic conditions and demonstrates Sodexo's resilient operating model and strong geographic and end market diversification. Sodexo has a consistent history of generating positive free cash flow (FCF) as a result of its stable operating performance and the low capital spending requirements inherent in the asset-light business services industry.

The ratings are further supported by Fitch's recently revised building blocks for EMEA Business Services companies which comfortably place Sodexo in the middle of the 'BBB' rating level, although many of Sodexo's company-specific traits are aligned with the 'A' category. Overall, Fitch views Sodexo's credit profile as stable and its credit metrics continue to remain in-line with Fitch's expectations.

Sodexo's business profile benefits from a diversified customer base, consistently strong customer retention rates and a broad geographic footprint. Sodexo has been increasing its sales contribution in fast-growing emerging markets (20% of H112 sales) in recent years which have helped to offset weakness in Continental European markets. The group is also benefiting from long-term structural change towards outsourcing in the foodservices industry. The level of outsourcing remains low, notably in segments such as healthcare and education, and in regions such as Emerging Markets and Europe.

Fitch views the group's reported cash position at H112 as strong at EUR1.2bn, relative to near-term maturities. Liquidity is further supported by committed credit facilities of up to EUR600m and USD800m that mature in July 2016, of which EUR330m was drawn to help finance a few acquisitions made in H112. Debt maturities ramp up in 2013 with the amortisation of USD140m US private placement notes due in September 2013 and, subsequently, EUR500m from the 2007 bond issue due in March 2014.

Due to the substantial cash holdings, Fitch's analysis considers Sodexo's leverage metrics both on a net and gross basis. Lease-adjusted funds from operations (FFO) leverage ratios improved in FY11 to 3.4x (2.0x net of unrestricted cash) from 3.7x (2.2x net of cash) due to a debt repayment of over EUR200m. As a result of the recent draw on the revolving credit line, Fitch expects FFO leverage metrics to worsen slightly in FY12.

Sodexo has not made any share repurchases through the first nine months of FY12, but has raised dividend payments by around 6% to EUR221m. Fitch expects the company to continue to grow organically while also allocating a portion of its positive FCF generation towards bolt-on acquisitions. Fitch considers Sodexo's appetite for bolt-on acquisitions as a substitute for investments in organic expansion. The agency views Sodexo as having adequate financial flexibility to implement these cash deployment initiatives while still maintaining a financial profile consistent with a 'BBB+' rating.

WHAT COULD TRIGGER A RATING ACTION?

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- A sustained deleveraging through debt repayment leading to FFO adjusted gross leverage falling permanently below 2.5x,
- FFO fixed charge cover ratio above 5.0x,
- FCF before dividends/total adjusted debt margin above 25% (currently 21%), along with sustained group operating EBIT margin between 6.5%-7.5%.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- Negative like-for-like sales growth and significant EBIT margin erosion combined with FFO adjusted gross leverage remaining above 3.8x,
- FFO fixed charge cover ratio below 3.5x and
- FCF before dividends/total adjusted debt margin below 18%.

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