OREANDA-NEWS. S&P Global Ratings today affirmed its preliminary 'B' long-term corporate credit rating on BiSoho S. A.S., the parent of France-based apparel retailer Groupe SMCP (SMCP). The outlook is stable.

At the same time, we affirmed our preliminary 'B' issue rating on BiSoho's proposed €471 million senior secured notes which BiSoho looks to issue as a combination of fixed rate and a floating rate notes. The recovery rating on these instruments is '3', reflecting our expectation of meaningful (50%-70%) recovery in the event of default.

We also affirmed our preliminary 'BB-' issue rating on BiSoho's proposed €70 million super senior secured revolving credit facility (RCF). The recovery rating on this instrument is '1', reflecting our expectation of very high (90%-100%) recovery in the event of default.

The preliminary rating is subject to the successful issuance of the senior notes and the RCF, our review of the final documentation. If S&P Global Ratings does not receive the final documentation within a reasonable time frame, or if the final documentation departs from the materials we have already reviewed, we reserve the right to withdraw or revise our ratings.

The preliminary ratings reflect our view of BiSoho's highly leveraged financial risk profile and fair business risk profile, that being the same underlying SMCP business that will be acquired by BiSoho from financial sponsor, KKR Retail Partners. BiSoho is the proposed holding company that will be used as the investment vehicle to acquire a majority stake in SMCP.

We view the proposed change of ownership as generally neutral from a credit perspective. We do not consider the credit profile of the broader Shandong Ruyi Group to be a constraint and it does not provide any additional uplift to SMCP's stand-alone credit profile. In our view, SMCP is a subsidiary with a moderately strategic level of importance to its ultimate parent, Shandong Ruyi Group. We view the SMCP investment as beneficial to Shandong Ruyi Group's longer-term strategy, providing the group with investment diversification into the European market, while also providing the potential for some synergistic benefits such as supporting SMCP's continued penetration strategy into Asia.

As part of the proposed transaction, SMCP has also announced plans to refinance its current debt structure by issuing €471 million of senior secured notesthat BiSoho is looking to issue as a combination of fixed rate and a floating rate notes (€371 million senior secured fixed rate notes and €100 million of senior secured floating rate notes). A new RCF of €70 million will also be put in place. Proceeds will be partially used to fund the acquisition by BiSoho and to repay existing SMCP debt.

In our view, SMCP's proposed capital structure under new ownership will result in a highly leveraged financial risk profile, with S&P Global Ratings-adjusted debt to EBITDA of about 5.5x-6.0x. The proposed capital structure includes €371 million senior secured fixed rate notes, €100 million of senior secured floating rate notes, and a €70 million RCF, which will be initially undrawn and used to support company's liquidity. Also forming part of the proposed capital structure is a €280 million payment-in-kind (PIK) shareholder loan instrument that we include as debt in our ratio calculations. Excluding the PIK instrument, we expect SMCP's reported debt-to-EBITDA to be about 4.5x in fiscal 2016. We continue to assess SMCP's business risk profile as fair, albeit at the lower end of the category. The group operates in the highly fragmented affordable luxury segment, bearing inherent fashion risk. The company aims to minimize this risk by focusing on already-existing trends, however, the company is exposed to fashion trends, including the risk of missing or adopting a trend too late. Partially mitigating this risk is SMCP's underlying business model, weighted heavily toward directly operated stores, which represent 94% of sales. This provides the company with greater control and responsiveness, allowing it to capitalize on market trends and meet customer demand.

Our base-case assumes:A slow but gradually improving French economy, with our forecast of GDP growth of 1.3% in 2016 and 1.5% in 2017;Continued execution of the store network expansion strategy, with the opening of about 90 new points of sale annually;Positive like-for-like sales, together with store network expansion, enabling the company to achieve double-digit revenue growth over the next two years;Capital expenditure (capex) of €35 million-€45 million per year; andContinued cost control supporting the sustainability of EBITDA margins at about 26% on an S&P Global Ratings-adjusted basis. Based on these assumptions, and following the expected completion of the refinancing transaction, we arrive at the following credit measures over 2016 and 2017:Funds from operations (FFO) to debt of between 8%-12% in 2016 and 2017; Adjusted debt to EBITDA of between 5.5x-6.0x in 2016, improving to between 5.2x-5.7x in 2017; andFOCF to debt of between 5%-10% in 2016 and 2017.The stable outlook reflects our view that the company will continue to successfully execute its store expansion strategy, which will be supported by positive like-for-like sales growth. We expect this to translate into continued earnings growth and positive FOCF generation, enabling the company to achieve EBITDA interest coverage of about 2x. It also reflects our view that the proposed change of ownership will not represent a major change or have any detrimental impact on SMCP's strategy, operations, or financial profile.

The ratings could be lowered should SMCP's store expansion strategy--particularly into new regions--falter, resulting in materially lower earnings and cash generation. Any material deterioration in profitability could also lead us to revise our assessment of SMCP's business risk profile to weak from fair. A negative rating action could arise from the inability to sustain positive FOCF or if adjusted EBITDA interest coverage fell significantly, leading to a deterioration of the company's liquidity position.

We view the potential for a positive rating action as remote over the next 12 months. This is due to our expectation that, upon exit of the current financial sponsors, KKR Retail Partners, the rating on SMCP will likely become constrained by our view of the broader group credit profile of the Shandong Ruyi Group. Any positive rating action would likely require a successful operating and financial policy track record under new ownership, as well as our view of a stronger credit profile for the broader group.