Casino spins

The recent rating action by Scope Ratings GmbH downgraded the issuer ratings of Casino, Guichard-Perrachon S.A. (Casino) and its guaranteed subsidiary Quatrim S.A.S. from B to CC.

The ratings are under review for a possible further downgrade. The senior unsecured debt rating was downgraded from B- to C, the senior secured debt rating was downgraded from B+ to CC, and the subordinated (hybrid) debt rating was downgraded from CC to C. The long-term debt category ratings and the S-4 short-term debt rating are also under review for a possible downgrade.

The downgrade is primarily driven by Casino’s initiation of a conciliation with creditors, which indicates a higher probability of debt restructuring. The conciliation aims to negotiate a reduction of Casino’s debt through measures such as a swap to equity or a distressed debt exchange. This follows an offer of a EUR 1.1 billion capital increase from EP Global Commerce a.s. The injection of capital would require a significant decrease in senior unsecured debt through bond buybacks or debt-to-equity swaps.

Scope believes there is a high likelihood that Casino’s debt will be materially reduced as a result of the conciliation. The exact recovery of the debt instruments remains uncertain due to potential asset disposals, the future merger with Teract, and the partnership with Les Mousquetaires. The timeline of these transactions is pending. If a debt restructuring occurs, it would likely be considered a distressed debt exchange, resulting in diminished value for creditors compared to the original terms.

Scope will resolve the under-review status once the conciliation is finalized. A positive rating action is unlikely but could be justified if a capital increase significantly improves the financial structure without debt restructuring. A rating confirmation would require sufficient transparency to show that Casino’s financial strength has not deteriorated further. A rating downgrade could occur in the event of a distressed debt exchange or restructuring.

In summary, the rating downgrade by Scope reflects the higher likelihood of debt restructuring following Casino’s initiation of a conciliation with creditors. The ratings are under review for a possible further downgrade, and the exact recovery of the debt instruments remains uncertain.

Possibly a tightrope walk

A rating agency needs to carefully navigate loan negotiations to assess whether payment difficulties have arisen because prematurely concluding payment difficulties can have significant consequences. Here are some reasons why it can be a tightrope walk for a rating agency in such situations:

• Timeliness of information: Loan negotiations often occur when a company is facing financial challenges or uncertainties. However, the rating agency may not have access to real-time information regarding the progress and outcome of these negotiations. It takes time for concrete developments to emerge, and premature conclusions can be misleading.
• Complex financial situations: Loan negotiations can be part of a broader financial strategy to address a company’s financial difficulties. This can involve various measures such as debt restructuring, refinancing, asset sales, or capital injections. Assessing the impact of these measures and their successful implementation requires a comprehensive understanding of the company’s financial position and its ability to address its obligations.
• Multiple stakeholders and interests: Loan negotiations involve various parties, including lenders, creditors, and shareholders. Each party may have different objectives and priorities, making it challenging to determine the ultimate outcome. Rating agencies need to consider the interests of all stakeholders and assess the likelihood of reaching a mutually agreeable solution.
• Legal and regulatory implications: Declaring payment difficulties prematurely can trigger legal and regulatory consequences, such as acceleration of debt, triggering defaults, or initiating bankruptcy proceedings. These actions can have a significant impact on a company’s financial stability and its ability to negotiate a favorable outcome. Therefore, rating agencies must exercise caution to avoid unnecessarily exacerbating the situation.
• Ratings impact: Ratings play a crucial role in the financial markets, influencing borrowing costs, investor perceptions, and access to capital. A rating downgrade can further complicate loan negotiations by worsening a company’s financial position. Therefore, rating agencies must balance their assessment of a company’s financial health while avoiding actions that could potentially harm the company’s ability to secure necessary financing.