Metro AG Outlook Revised To Negative On COVID-19-Related Sales Decline; 'BBB-' Ratings Affirmed
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Research Update:
Metro AG Outlook Revised To Negative On
COVID-19-Related Sales Decline; 'BBB-' Ratings
Affirmed
May 15, 2020
Rating Action Overview
PRIMARY CREDIT ANALYST
- We believe the outbreak of COVID-19 will cause an about 5% decline in German food wholesaler Patrick Janssen
Metro AG's revenue, which was €27.1 billion last year, given 48% of sales stem from the hotel Frankfurt
and restaurant sector, which has been disrupted by measures to contain the virus. (49) 69-33-999-175
patrick.janssen
- We expect this decline will weigh on earnings and cash generation, and will likely push Metro's @spglobal.com
S&P Global Ratings-adjusted debt to EBITDA to 3.5x at year-end fiscal 2020, which is half a
SECONDARY CONTACT
turn more than we anticipated previously.
Mickael Vidal
- We are therefore revising our outlook to negative from stable and affirming our long-term issuer Paris
credit rating on Metro at 'BBB-'. + 33 14 420 6658
mickael.vidal
- The negative outlook reflects the uncertainty associated with COVID-19 and the possibility of a @spglobal.com
downgrade if the pandemic leads to adjusted debt to EBITDA of over 3.5x on a prolonged basis
and funds from operations to debt below 20%, or a structurally weaker hospitality industry,
which would lead us reevaluate our assessment of Metro's business strength.
Rating Action Rationale
As a result of the COVID-19 outbreak in Europe, hotels, restaurants and caterer demand has
declined sharply. Our revised base case assumes an organic 2020 revenue decline of about 5%,
based on the assumption that COVID-19 will be contained in Europe by the end of the
second-quarter 2020 and that consumer spending will recover moderately in the third quarter.
Following restrictions introduced by European governments to contain the spread of the virus,
Metro has witnessed a very significant decrease in sales to customers in the hospitality
segment--mainly hotels, restaurants, and caterers (HoReCas)--which comprised about 48% of
group sales in fiscal 2019 (ending Sept. 30, 2019). Most of these businesses have been forced to
close their operations as part of the lockdown. Although Metro's Trader (independent retailer) and
SCO (services, companies, and offices) clients have stocked-up on purchases, and a number of
www.spglobal.com/ratingsdirect May 15, 2020 1Research Update: Metro AG Outlook Revised To Negative On COVID-19-Related Sales Decline; 'BBB-' Ratings Affirmed existing stores have been opened to the wider public private customer group, which will support sales in coming months, Metro has announced that each additional month with the current level of restrictions will result in sales losses of approximately two percentage points of sales growth compared with the previous year, and has withdrawn its earnings guidance for the current fiscal year. While some countries, such as Germany, have agreed to reopen restaurants and hotels in coming weeks, we believe that operations will remain constrained by distancing measures and that Metro will experience only gradually recovering customer demand. Furthermore, hospitality businesses in other significant regions for Metro, such as France, remain in lockdown for now. We believe there is a risk that social distancing measures and low customer demand due to a sharp recession following the outbreak will affect the hospitality sector for even longer than we currently anticipate, especially in regions dependent on tourism such as Italy, Spain, or Turkey. We do not believe cost savings and cash preservation measures will prevent a decline in earnings and cash flows in 2020 compared with our previous forecast. The company has introduced initiatives to support earnings and cash flows during the period of operational disruption, such as the introduction of regular state-funded part-time work for some of its employees and a reduction in capital expenditure (capex). The company should also benefit from generally better margins in the Metro's SCO segment, which has recently experienced strong sales growth. Nevertheless, because more than 95% of Metro's stores and operations remain open, we expect profitability will weaken due to the still-substantial share of fixed costs. Furthermore, because they remain open, the company also has less leverage to renegotiate rent costs compared with peers that had to shut stores. As a result, we expect S&P Global Ratings adjusted funds from operations (FFO) to debt will fall slightly below 20% in 2020 and free operating cash flow (FOCF) will be insufficient to cover dividends already paid, which is not in line with the current rating. However, we acknowledge management's financial policy commitment and solid track record of maintaining credit metrics within the ranges commensurate with the current rating. This is supported by material cash generation capacities that could be unlocked, for example by selling its remaining 20% stake in China, in which case we expect the proceeds would be used to preserve liquidity rather than for distribution, or via a further reduction in capex or a cut in dividends for next year. Uncertainties regarding the COVID-19 pandemic are clouding earnings visibility. We acknowledge a high degree of uncertainty about the rate of spread, peak of the coronavirus outbreak and possible relief of government actions. Some government authorities estimate the pandemic will peak at about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves we will update our assumptions and estimates accordingly. We see a risk that governments could impose further restrictions, a new contagion wave might impose new governmental measures after a period of openness, or existing restrictions may continue for longer than we anticipate. This creates potential downside risks to our projections of Metro's future earnings and cash generation. The effects of the COVID-19 pandemic challenges our view of the HoReCa business' ability to support Metro's earnings growth, and the recurring nature of the foodservice business. Before the COVID-19 outbreak and the associated public measures to contain its spread, we considered Metro's leading position in the hospitality segment as supportive when compared with food retailers, for instance. The group's positioning in this segment allowed for more predictable and faster earnings growth, supported by increasing dining-out trends throughout its main www.spglobal.com/ratingsdirect May 15, 2020 2
Research Update: Metro AG Outlook Revised To Negative On COVID-19-Related Sales Decline; 'BBB-' Ratings Affirmed geographies, which stimulated demand from its fragmented HoReCa customer base. In contrast, traditional food retailers were negatively affected by these trends and were operating on more competitive and price sensitive markets. In this respect, we previously viewed management's strategic repositioning toward foodservice for the HoReCa and trader segments, as well as disposal of its hypermarket business, as supporting cash flow predictability and our overall view of Metro's business. However, the severe impact of COVID-19 on the HoReCa segment is now challenging the recurring nature of the foodservice business, as well as its growth prospects. As market leader, Metro could also benefit from a further market consolidation in the European food wholesale market. We acknowledge that Metro is the largest European food wholesaler, and believe it has the financial resources to withstand this crisis and remain a strong partner for smaller hospitality operators. We expect smaller competitors will be more profoundly affected over the long term, which could ultimately benefit Metro's market position. Additionally, if social distancing and weak demand for restaurants and hotels continues for longer than we expect, we believe Metro's Trader and SCO segments would benefit, which could somewhat offset the negative impact of the pandemic on the HoReCa segment. Environmental, social, and governance (ESG) factors relevant to the rating action: - Health and safety Outlook The negative outlook on Metro reflects the material uncertainty surrounding the COVID-19 pandemic. We assume operational lockdowns across the group's hotels, restaurant, and caterer segment will last about three months, depending on the region, and a moderate pickup in activity through third-quarter 2020, which should accelerate toward the end of the year. Given that social distancing could remain a meaningful barrier to sales recovery in the hospitality sector, in our view, the group will likely feel the headwind to demand until end of the calendar year. On this basis, we still expect S&P Global Ratings-adjusted debt to EBITDA will increase to 3.3x-3.6x and FFO to debt of about 17%-21% in fiscal 2020. We will update our expectations and forecasts as we receive more information. Downside scenario We could lower the rating if: The impact of COVID-19 was more severe that we currently assume, resulting in adjusted debt to EBITDA remaining above 3.5x on a prolonged basis, FFO to debt below 20%, free operating cash flow after all lease payments remaining negative, or liquidity weakening this year to a degree that cannot be offset by any remedial action; or The pandemic led to a structurally weaker hospitality industry as a whole, exemplified by Metro's earnings in this key segment not recovering to pre-COVID-19 level. This could occur in the case that social distancing burdens operators beyond 2020. In this case, we could reevaluate our current assessment of Metro's business strength, regardless of the development in credit metrics. Upside scenario We could revise the outlook to stable once we have more certainty regarding the duration and www.spglobal.com/ratingsdirect May 15, 2020 3
Research Update: Metro AG Outlook Revised To Negative On COVID-19-Related Sales Decline; 'BBB-' Ratings Affirmed
severity of the COVID-19 pandemic and its effect on the industry and on Metro's operating
performance, liquidity, and cash flow. In particular, an outlook revision would depend on the
group's ability to preserve cash, restore its earnings from the hospitality segment or, if affected in
this segment over the long term, to shift its business focus to segments less affected by the
pandemic, and improve its S&P Global Ratings-adjusted debt to EBITDA to below 3.5x and FFO to
debt to sustainably above 20% after 2020.
Company Description
Germany-based Metro is Europe's largest wholesale and food service operator and the second
largest in the world. It has strong business-to-business operations under its wholesale business
in 34 countries, targeting HoReCa and trading companies, representing about 70% of customer
base. The group also has active real estate operations through which it buys land parcels and then
develops and sells them after a few years, thus realizing value appreciation in the process. For
fiscal 2019, Metro reported revenue of €27.1 billion and EBITDA of €1.7 billion. Metro's store
network comprised 678 locations at year-end fiscal 2019.
Following the failed voluntary takeover bid from EP Global Commerce (EPGC) in 2019, EPGC
became Metro's largest minority shareholder with nearly 30% ownership, and Meridian
Foundation and Beisheim Holding combined are the second largest.
Our Base-Case Scenario
Real GDP growth of about -7.5% in the eurozone in calendar year 2020, and 5%-6% in in 2021,
weighing on consumer purchasing power.
Revenue to decline by about 5.0% in fiscal 2020, mainly due to the disruption in the hospitality
sector following the introduction of COVID-19-related government measures, recovering to a large
extent in 2021, but still somewhat hampered by lower expected consumer sentiment and
constrained operations.
Adjusted EBITDA margins of 4.5%-5.0% in fiscal 2020 and 5.0%-5.8% in fiscal 2021 compared
with 6.2% in fiscal 2019.
Capex of €400 million-€450 million in fiscal 2020, and €450 million-€500 million in fiscal 2021.
Disposal proceeds of more than €1.8 billion in fiscal 2020 from the China and hypermarket
businesses, including repatriation of most of the cash in China we already consider as part of
surplus cash in fiscal 2019, and proceeds from Chinese transactions received in April 2020.
Stable dividends of about €260 million in fiscals 2019 and 2020, in line with historical payout
ratios, and stable underlying earnings per share, with certain flexibility to reduce payments in
2021 in case of stronger liquidity stress.
Potential smaller opportunistic acquisitions of up to €100 million per year from fiscal 2020, mainly
in the foodservice segment.
Key metrics
2018a 2019a 2020e 2021f
Revenue (€ bil) 29,476 27.082 25.0-26.0 26.5-27.5
www.spglobal.com/ratingsdirect May 15, 2020 4Research Update: Metro AG Outlook Revised To Negative On COVID-19-Related Sales Decline; 'BBB-' Ratings Affirmed
2018a 2019a 2020e 2021f
EBITDA (€m) 1,782 1,767 1,200-1,300 1,400-1,500
EBITDA margin (%) 6.0 6.5 4.5-5.0 5.0-5.5
Debt to EBITDA (x) 3.3 3.1 3.2-3.7 3.0-3.3
FFO to debt (%) 20.8 22.1 17.0-21.0 20-23
FOCF to debt(%) 9.1 8.0 4.0-9.0 3.0-8.0
NB: 2018 excludes the hypermarket business and includes the Chinese business business; 2019
excludes both the hypermarket and China businesses, while the repatriated cash balance in China
is part of our debt calculation for 2019. a--actual. e--expected. f--forecast. FFO--Funds from
operations. FOCF--Free operating cash flow.
Liquidity
We assess Metro's liquidity as adequate. We expect its liquidity sources will be just above 1.5x its
liquidity uses over the next 12 months. We do not expect sources of liquidity will drop below uses,
even if EBITDA were to decline by 15% more than we currently foresee during this period. We think,
however, that the group would not be able to withstand high-impact, low-probability events such a
major sovereign debt crisis without a certain need of refinancing. Although it has significant cash
balances and no maturing long-term debt, these would not be sufficient to manage historically
significant intrayear working requirements and related drawings on facilities in such a scenario.
We also base our liquidity assessment on our expectation that the group will maintain good access
to different financing sources and at least adequate headroom under its covenants.
We expect principal liquidity sources over the 12 months from March 31, 2020, will include:
Cash on balance sheet of about €1.0 billion (including recently repatriated cash in China);
Committed and undrawn long-term credit facilities with at least 12 months remaining to maturity
of €1.0 billion; and
Cash FFO of €550 million-€600 million.
Net disposal proceeds of about €1.5 billion.
We expect principal liquidity uses over the same period will include:
Debt maturities of €1.7 billion-€1.9 billion, mainly outstanding to short-term commercial papers
and drawing of short term credit lines;
Seasonal and structural working capital requirements of €100 million-€200 million;
Capex of €400 million-€450 million; and
Dividends of €260 million, with flexibility to reduce further if needed.
Covenants
Compliance expectations
We estimate that headroom under the financial covenants will remain material at 40%-60% in
www.spglobal.com/ratingsdirect May 15, 2020 5Research Update: Metro AG Outlook Revised To Negative On COVID-19-Related Sales Decline; 'BBB-' Ratings Affirmed 2020 and 50%-60% thereafter, and hence envisage full availability of its two main syndicated credit facilities of €850 million and €900 million, maturing in February 2022. Requirements Metro is required to comply with a net debt to EBITDA and an interest coverage covenant in these facilities. Issue Ratings - Subordination Risk Analysis Capital structure As of Sept. 30, 2019, Metro's capital structure comprised €2.7 billion of unsecured debt, with only a negligible amount of secured debt issued at the parent level. Analytical conclusions We rate Metro's debt 'BBB-', in line with the issuer credit rating, because no significant elements of subordination risk are present in the group capital structure. Ratings Score Snapshot Issuer Credit Rating: BBB-/Negative/A-3 Business risk: Satisfactory Country risk: Intermediate Industry risk: Intermediate Competitive position: Satisfactory Financial risk: Significant Cash flow/leverage: Significant Anchor: bbb- Modifiers Diversification/portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Adequate (no impact) Management and governance: Satisfactory (no impact) Comparable rating analysis: Neutral (no impact) www.spglobal.com/ratingsdirect May 15, 2020 6
Research Update: Metro AG Outlook Revised To Negative On COVID-19-Related Sales Decline; 'BBB-' Ratings Affirmed
Related Criteria
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March
28, 2018
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Dec. 16, 2014
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate
Entities, Nov. 13, 2012
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
Ratings List
Ratings Affirmed; Outlook Action
To From
Metro AG
Issuer Credit Rating BBB-/Negative/A-3 BBB-/Stable/A-3
Senior Unsecured BBB- BBB-
Commercial Paper A-3 A-3
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors,
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criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. A description of each of
S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at
https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352 Complete ratings
information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating
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www.spglobal.com/ratingsdirect May 15, 2020 7Research Update: Metro AG Outlook Revised To Negative On COVID-19-Related Sales Decline; 'BBB-' Ratings Affirmed
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