The rating outlook for most European retailers is stable, but a more difficult trading environment in the second half of 2007 and into 2008 may put pressure on those that are more reliant on discretionary spending, Moody’s Investors Service said in a new Special Comment.
“European retailers appear to face a somewhat softer period of consumer spending, with several companies showing weakening like-for-like sales,” said Richard Morawetz, a Moody’s Vice-President-Senior Analyst and author of the report. “Nevertheless, this follows a period of stable and in some cases improving performance for most retailers in 2006.”
Moody’s Economy.com expects economic growth to slow in the Euro zone in the second half of 2007, coming in at 2.5% for the year as a whole.
Consumption may be impacted by recent credit market turmoil and the potential knock-on effect on consumer confidence. In this context, Moody’s noted the strategy of some retailers to grow their international presence.
“Companies that are expanding into emerging markets are currently benefiting from faster growth in those countries,” said Morawetz.
“While we generally view positively the diversity offered by an international presence, we are also aware of the potential for greater volatility in some markets.”
There has been little M&A activity in the sector this year and none — excluding the leveraged buyout (LBO) of Alliance Boots — which has directly impacted ratings, the report notes. The current turmoil in the credit markets has clearly constrained the funding available for LBOs, which are also likely to be subject to more restrictive covenants.
Moody’s noted, moreover, that the difficulties in syndicating the bank debt might restrain the degree of leverage in future LBO transactions. This has been a point of discussion in the potential buyout of J Sainsbury, for example.
“There is ongoing pressure for shareholder returns, which have in part been a catalyst for property transactions, although recent shareholder returns have been accommodated within the existing ratings,” added Morawetz. Several retailers have also taken measures to address their pension deficits, which Moody’s generally views positively from a credit perspective.
“With M&A activity currently subdued, general retail demand will likely be the main driver of ratings,” said Morawetz.
