High Yield : Casino: Credit Update

On the positive side, the group has (i) best in class underlying retail brands and business, (ii) exposure to well-positioned formats in the medium/long term , and affluent regions (iii) ample unlevered FCF, (iv) non-volatile industry, (v) ownership of leading Brazilian players , #2 e-commerce retailer in France C-discount , and high-quality real estate portfolio , (vi) good liquidity profile with recently renegotiated RCF and covenants , (vii) possibility to continue asset disposal plan beyond €4.5bn (e.g. sell LatAm business). T he credit profile is constrained by (i) elevated leverage and limited prospects for substantial deleveragin g via remaining asset disposal program, (ii) structurally negative FCF generation and today’s high uncertainty regarding FY2022 and FY2023 earnings (primarily due to inflation) that limits chances for FCF to turn positive over the short/medium term and deleveraging beyond 2023 when asset disposal plan is complete , (iii) highly competitive food retail environment in France and exposure to high-end formats (convenience, premium, organic) that are less attractive in declining-purchasing-power environment, (iv) complex ownership structure, the Group is owned by multiple leverage holdings, (v) limited historical and potential contribution from LatAm subsidiaries , (vi) uncertainty in timing of the remaining asset disposals (which is important when the Group burns cash), (vii) mixed management track record of delivering on its promises (partly impacted by the pandemic), (viii) unclear situation about Rallye’s €1.9bn debt repayment due in February 2025. Therefore, after the recent repricing , we are comfortable in taking overweight position s in the short-term unsecured June 2022 and January 2023 notes that are fully covered by the segregated account and future proceeds from the asset disposal plan. Also, secured 2024 notes look attractive as well on the back of high-quality collateral and comfortable recovery value of the secured debt (current gross secured leverage is 2.7x while business value is about 6.0x -7.0x ). Spread per turn of leverage supports the argument. Apart from that, we find it difficult to estimate debt repayment beyond 2024 and therefore underweight the long end of the curve. Our stand regarding 2024 and 2025 SUN might change if the management announces extension of disposal plan (e.g. sell of the stake in LatAm subsidiaries ) , subject to operating performance . Also, in the last part of the paper we talk about tokenization of real estate assets and how it might help Casino monetize its asset base. That might reduce illiquidity premium via liberalization of RE market for more investment participants , increase demand, and eventually bring more proceeds from divestitures of RE assets that will result in better deleveraging prospects. However, the technology is at the infant stage, and investment community knowledge about it is still limited, but adoption is growing fast and might soon allow the Group to capitalize on it.