Fitch Ratings revises outlook on Metro AG's Issuer Default Rating to negative from stable, reflecting increased difficulty retailer faces reducing debt in weak European consumer environment

Cindy Allen

LONDON , November 6, 2012 (press release) – Fitch Ratings has revised the Outlook on Metro AG's (Metro) Long-term Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR and senior unsecured rating at 'BBB'. Fitch has also affirmed the unsecured rating of the notes issued by Metro Finance BV at 'BBB'. These notes are guaranteed by Metro AG.

The Negative Outlook reflects the increased challenges faced by Metro in reducing leverage due to the weak consumer environment primarily in southern European countries and the group's exposure to non-food retail activities. Fitch estimates that Metro's exposure to Spain, Italy, Greece and Portugal represents about 12% of group's sales and 25% in Eastern European countries. Fitch expects that weak consumer demand will continue to weigh negatively on the group's operating performance, as evidenced by the revised guidance for group EBIT before special items in FY12 at circa EUR2bn. As a result, Fitch expects Metro's group lease-adjusted net debt/EBITDAR ratio to increase to about 3.5x in FY12 from 3.2x in FY11 which is high for the current 'BBB' rating level.

The 'BBB' rating continues to reflect Metro's size and leading market share positions in many markets as well as its broad geographic diversification. However, the protracted weak consumer sentiment, intense price competition from food and non-food retailers and online retailers will continue to put pressure on the group's performance and credit profile. Key challenges remain Metro's capacity to improve like-for-like sales growth, improve profitability in its consumer electronics division Media Markt and Saturn and food retail division Real. In addition, Metro's consumer electronics business still needs to roll out its internet platform and develop a successful multi-channel business.

The group's liquidity is adequate given the existing cash balances (EUR2.1bn as at September 2012) and amount available of undrawn syndicated and bilateral credit lines (EUR3.1bn) relative to the amount of short-term debt borrowings (EUR2.8bn).

Fitch has not factored any large asset disposals or divestment of the group's non-core assets into its base case projections. Fitch also understands that the group intends to review its capex programme and focus on working capital management in order to reduce debt in 2013.

WHAT COULD TRIGGER A RATING ACTION?

Positive: future developments that may, individually or collectively, lead to positive rating action include:
- Group's operating margin above 3% and improved operating margins in Metro's core divisions, i.e. Metro Cash&Carry and Media Markt Saturn
- The divestment of the group's non-strategic activities, with cash proceeds used to reduce debt could have a positive impact on Metro's financial position and outlook, but is unlikely to lead to a higher rating,
- Group's lease-adjusted net debt/EBITDAR sustainable at or below 3x (3.5x on FFO net lease-adjusted basis)

Negative: future developments that may, individually or collectively, lead to negative rating action include:
- A further sharp contraction in performance, notably in the cash and carry and/or consumer electronics divisions, or a fall in the group's operating margin to below 2.5%, would have a negative impact on the ratings
- Group's lease-adjusted net debt/EBITDAR above 3.5x (4x FFO net lease-adjusted leverage)

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