Casino's Debt Cut to Junk at S&P Amid Muddy Waters Attack

  • Cites weak condition in Brazil, competitive pressure in France
  • Short seller Block: Casino's holding structure is `parasitic'

Casino Guichard-Perrachon SA Chief Executive Officer Jean-Charles Naouri suffered a blow in his battle with short seller Carson Block after Standard and Poor’s cut the French grocer’s rating to junk, making it more expensive to finance debt.

The long-term debt rating was lowered by one step to BB+, the highest non-investment grade, Standard & Poor’s said in a statement Monday. The outlook is stable. The shares fell as much as 4.8 percent before paring the decline.

S&P said it may consider a “negative rating action” if Casino doesn’t reduce debt with the proceeds from planned asset disposals or if the company substantially increases dividends paid to shareholders.

To reduce debt, Naouri is racing to complete a plan to raise 4 billion euros ($4.5 billion) by selling some of its most profitable businesses including grocery operations in Thailand and Vietnam. The grocer doesn’t intend to increase its borrowings, and the proceeds from the asset sales should be higher than planned, Chief Financial Officer Antoine Giscard d’Estaing said in a phone interview Monday.

Financial Engineering?

Carson Block’s Muddy Waters contends that Casino is using financial engineering to mask a deterioration of its core French retail business and that shareholder Rallye has too much debt and depends on Casino’s dividend stream to make interest payments, allegations Casino has dismissed. In an interview Monday, Block said Casino’s holding structure is “parasitic” and that Casino functions mainly to service Rallye’s debt.

The shares rose 1.3 percent to 50.01 euros at 5:29 p.m in Paris. The stock had gained about 20 percent in the past month as Casino reported the sale of its stake in a Thai grocer and amid speculation a unit in Vietnam could fetch more than 1 billion euros, according to John Kershaw, an analyst at Exane BNP Paribas.

“The downgrade therefore is a blow, but we expect Casino will buy in bonds, softening the financial burden,” Kershaw said in a note. S&P’s decision could knock as much as 14 percent off Casino’s 2017 earnings, for which the consensus is 440 million euros, he said.

The downgrade will raise costs of bond debt by less than 20 million euros in 2016, excluding future bond buybacks and has no effect on liquidity, Saint-Etienne, France-based Casino said in a statement. Casino’s 750 million euros of hybrid bonds fell as much as 5 cents to 79 cents on the euro on Monday, the lowest in almost a month, according to data compiled by Bloomberg. They were quoted at 82 cents at 4:00 p.m. in London.

Business Disposals

Casino agreed to sell its stake in Thailand’s Big C Supercenter Plc for 3.1 billion euros in February. It also plans to dispose of its business in Vietnam and close sites in Ecuador and Panama.

The disposal of its stake in Big C Thailand to TCC Holding Co. is imminent, and the sale of its Big C Vietnam assets is progressing well, Casino said Monday.

S&P said 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.

S&P also said the downgrade reflected Rallye’s debt load, which relies on dividend payments from Casino to be serviced even in periods of stress and weak operating performance.

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.

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