Casino Rating Cut Further Into Junk by S&P on Debt Concerns

(Bloomberg) -- Casino Guichard-Perrachon SA’s debt rating was cut further into junk territory by Standard & Poor’s, undermining the French grocer’s effort to reassure investors about its financial position.

S&P cut the rating one notch, to BB from BB+. The move steps up pressure on Casino to bolster its performance as it battles with short seller Muddy Waters Capital LLC, which has taken aim at the retailer’s complicated financing amid brutal competition in France.

The cut followed a plunge in Casino’s shares on Friday when the hedge fund flagged a delayed regulatory filing by one of the retailer’s subsidiaries. The company shot back Monday that the ratings cut will have no impact on its liquidity. The shares fell as much as 2 percent in early Paris trading but were about unchanged later in the morning.

“Overall, our business in France is strong at this stage,” David Lubek, Casino’s deputy chief financial officer, said in an interview with Bloomberg TV on Monday. “The results of the revamping that we did recently, this shows in the sales momentum that we see.”

Debt Concerns

Investor concerns about the debt levels of Casino and its parent, Rallye SA, have grown amid a rout in emerging-market currencies. Latin America provides more than 40 percent of the grocer’s revenue.

Rallye, through which Casino Chief Executive Officer Jean-Charles Naouri controls the retailer, needs to repay at least 670 million euros ($778 million) of bonds in October and 300 million euros in March. The more Casino’s shares fall, the less room Rallye has to maneuver, since its credit lines require it to pledge Casino shares as collateral.

“The recent significant drop in Casino’s share price, and widening of credit spreads at both Casino and its immediate and highly leveraged holding company Rallye, point to elevated refinancing and capital structure risks at Rallye,” S&P said.

S&P’s action doesn’t take into account the company’s plan to sell 1.5 billion euros of assets, the grocer said in a statement.

“We have already had some very nice indicative offers,” Lubek said in the Bloomberg TV interview. He said the company is committed to 1 billion euros in debt reduction this year, “financed by disposal as well as our cash generation.”

Casino’s debt and financial leverage have remained above S&P’s expectations for a BB+ rating for more than two years, despite good business momentum and management’s intentions to sell assets to reduce debt, the ratings agency said.

Stock Rebound

The stock has plunged more than 45 percent this year. Rallye’s 465 million euros of bonds due in April 2021 fell for a fifth day, down to 55 cents on the euro, the lowest since the notes were issued in 2014, according to data compiled by Bloomberg.

Credit-default swaps insuring Rallye’s bonds against default for one year jumped to the equivalent of 3,557 basis points on Friday, the highest on record, and were little changed on Monday, data from CMA show. An increase signals deterioration in perceptions of credit quality.

Casino is also facing debt maturities in the short term, with 352 million euros of bonds due in November and 679 million euros due in August next year, according to data compiled by Bloomberg. The company said in its first-half results in July that upcoming maturities are “easily covered” by 5.5 billion euros of liquidity made up of cash, cash equivalents and undrawn credit lines.

Still, Casino’s implied borrowing costs have soared. Its notes due next year are quoted at a yield of about 8 percent, compared with less than 1 percent at the start of June, data compiled by Bloomberg show.

Heavily Shorted

Muddy Waters, run by short seller Carson Block, disclosed a bet against the stock in 2015, and other bears have piled in since. Almost a third of the company’s shares available for trading -- excluding Naouri’s stake -- have been sold short, the highest among European grocers, according to data compiled by IHS Markit Ltd.

On Monday, Casino gave more details about its finances after criticism by Muddy Waters on Friday.

Casino said it amended its half-year results presentation in response to questions raised in a recent meeting with investors. In a separate statement, the retailer gave a breakdown of the 2.1 billion euros in cash it held as of the end of June, and responded to several questions about working capital and whether the soccer World Cup was responsible for good July revenue figures.

“Our excellent performances in all banners persisted throughout the summer season,” Casino said. “They are due to the dynamic touristic season, the advantageous geographic positioning of our formats and our commercial innovations.”

©2018 Bloomberg L.P.