Investing.com -- Moody's (NYSE: MCO ) Ratings has announced a downgrade in the ratings of Victoria plc, including its long-term corporate family rating (CFR), from B3 to Caa1. The downgrade also reflects on the company's probability of default rating, which has been adjusted to Caa1-PD from B3-PD. The ratings of Victoria's €500 million and €250 million backed senior secured notes due in 2026 and 2028 respectively have also been downgraded to Caa1 from B3. Moody's maintains a negative outlook on the company.
The downgrade is primarily driven by the heightened risk of refinancing the company's £150 million revolving credit facility (RCF) and the €500 million backed senior secured notes, which are due in February and August 2026 respectively. Moody's anticipates an improvement in Victoria's operating performance in the second half of the fiscal year ending in March 2025, and throughout fiscal 2026, due to a recovery in demand and significant cost-saving initiatives. Nonetheless, there is considerable uncertainty surrounding the trajectory of the operating performance recovery, which could potentially be undermined by weak consumer confidence and competitive pressures.
As of the last twelve-month period ending in September 2024, Victoria's Moody's-adjusted debt/EBITDA leverage stood at 9.9x. Moody's expects this to improve to 7.3x by the end of fiscal 2026. However, given the company's high leverage and the potential for negative free cash generation, the timely and cost-effective refinancing of the senior secured notes remains uncertain.
Victoria's current market capitalization is approximately £140 million, relatively modest against borrowings of £984 million as of the end of September 2024. This includes IFRS16 lease liabilities of £172 million. This disparity adds to the uncertainty regarding the sustainability of the current capital structure.
Victoria's Caa1 CFR is further constrained by several factors. These include the company's exposure to integration risk following numerous acquisitions in recent years, activities in mature markets with competitive pressures, sale of consumer discretionary items correlated with the economic cycle, and exposure to volatile raw material prices and foreign currency movements. The rating is, however, supported by the company's leading positions within the fragmented European soft flooring and ceramic tiles markets, focus on independent retail channels with greater customer diversity and pricing power, low exposure to the new construction segment, and flexible cost structure.
Victoria's governance is a major factor in today's rating action, highlighting the need to address the 2026 debt maturities. The company's liquidity is currently weak, with approximately £95 million of cash on the balance sheet as of the end of September 2024. Moody's-adjusted free cash flow is expected to be weak over the next 12 to 18 months, potentially compounded by higher borrowing costs if the €500 million backed senior secured notes due in August 2026 are refinanced.
The negative rating outlook reflects the uncertainty associated with the recovery of operating performance, the timing and terms of Victoria's debt refinancing, and the potential sustainability of the post-transaction capital structure and cost of debt.
The negative outlook indicates that an upgrade is unlikely over the next 12-18 months. However, successful refinancing of its upcoming maturities, leading to sustainable improvements in key financial metrics, could result in an upgrade. Conversely, any deterioration in liquidity or failure to refinance its upcoming maturities could lead to a downgrade.
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