Casino’s debt cut to junk at S&P amid muddy waters attack

The facade of a Casino supermarket in the 20th Arrondissement of Paris, France, Thursday, March 16, 2006. Casino Guichard-Perrachon SA, the French food retailer with stores on four continents, rose the most in 10 months in Paris trading after fourth-quarter revenue increased 19 percent, beating analysts' estimates. Photographer: Owen Franken/Bloomberg News


Casino Guichard-Perrachon was cut to junk by Standard and Poor’s, increasing the French grocer’s debt costs as short seller Carson Block attacks its accounting.
The long-term debt rating was lowered by one step to BB+, the highest non-investment grade, Standard & Poor’s said in a statement on Monday. The outlook is stable. S&P had said it may lower it as many as two levels.
“We continue to view the group’s financial risk profile as significant, however, as the steep decrease in Casino’s earnings has been partly tempered by its swift asset disposal in Thailand,” S&P said in the statement. Casino doesn’t intend to borrow once it completes a series of disposals, and the proceeds from those asset sales should be higher than planned, Chief Financial Officer Antoine Giscard d’Estaing said in an interview.
S&P’s downgrade deals a blow to Paris-based Casino, which has been seeking to stave off claims by Block’s Muddy Waters LLC about its financial position. The short-seller contends that Casino is using financial engineering to mask a sharply deteriorating core business and that shareholder Rallye has too much debt. Casino has rejected the claims, saying it has a solid financial structure and that it may take legal action.
Casino said in a statement responding to the S&P downgrade that the disposal of its stake in Thai supermarket chain Big C Thailand to TCC Holding Co. for 1.3 billion euros ($1.5 billion) is imminent, and that the sale of its Big C Vietnam assets is progressing well.
It said that the S&P downgrade would raise its costs of bond debt by less than 20 million euros in 2016.
The company has been selling assets in Asia and Latin American to cut debt and aims to raise 4 billion euros through asset sales this year. The ratings agency cited the weak macro-economic outlook in Brazil, where Casino has premium, convenience and discount stores, and competitive pressures in the French food retail sectors, as reasons for the downgrade.
S&P said that the asset disposals were reflected in its stable outlook for the company, as it expected Casino to use the proceeds to pay down debt in France and partly recover its profitability. However, the disposals would also lead to a loss of business diversification, said S&P, at a time of weak outlook for markets in South America, where Casino derives almost half of its revenue.
“The repositioning of the hypermarkets in France will likely continue to be a challenge and constraint for the group’s financials,” S&P said. “Although we expect some recovery and improved profitability in France, in our view this is unlikely to be strong enough to offset the severe operating weakness in Brazil, which we expect will continue to experience trading pressures throughout 2016.”
Casino reported a 35 percent drop in 2015 profit. The stock has dropped 43 percent in the past 12 months. About 21 percent of the retailer’s free float, or the shares traded on the market, are shorted, according to Markit data.
S&P said it may consider a “negative rating action” if Casino doesn’t reduce debt with the proceeds from its disposals or if the company substantially increases retribution to shareholders.

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