We reaffirm our SR1 short-term rating, the second-highest grade in our rating scale, for the €1,500m NEU CP instrument of Sonepar SAS, recently increased from the original €500m program. Family-owned Sonepar is the world’s largest B2B distributor of electrical products, solutions and related services, a fragmented market in which the group holds an 8% share globally.
Our SR1 rating reflects Sonepar’s strong business profile and credit metrics, and its excellent liquidity profile, factors which are expected to see it through the current exceptional environment caused by the Covid-19 pandemic. The group reported solid results for 2019, with single-digit organic sales growth (revenues amounted to €24bn), high-single-digit EBIT growth, and continued improvement in free cash flow and leverage.
Our rating is supported by Sonepar’s diversified product offering, its strong local footprint and distribution network, and limited customer concentration. Sonepar benefits from its large scale, operating in four continents, with the bulk of sales being generated in Europe and North America where the group has leading market positions. This is a key factor as intense competition results in low operating margins, making scale a key driver for profitability.
Sonepar has gone a long way to digitalizing its operations - and on this front the group is ahead of peers, which is expected to yield further efficiency gains and support margins.
The industry is anticipating positive long-term trends on the back of rising energy needs and electrical uses, paving the way for further growth in all regions, including in emerging markets where B2B electrical product distribution has had a low penetration rate so far. We expect Sonepar to benefit from these trends, especially in fragmented markets where the group is already present and well positioned to drive market consolidation. Sonepar has a long history of M&A - it completed over 135 small-to-medium-size deals over the past twelve years (representing over €10bn of acquired sales) - and a good track record for integration. This is supported by the group’s policy to involve local management in the acquisition and integration processes.
Sales are subject to some degree of cyclicality due to the group’s exposure to the construction and renovation end-markets for residential and commercial buildings, and to various other industries. Mitigating this, Sonepar has displayed resilience both in terms of operating margins and cash generation during past economic downturns, and has outperformed peers over the past few years. It has consistently achieved a high level of free cash flow, a trend that we expect to continue over the medium term, which provides scope for deleveraging after the expected exceptional deterioration in credit metrics in 2020 due to the crisis.
Our rating factors in Sonepar’s relatively modest leverage (Qivalio’s net adjusted debt/EBITDA within a 1.5-2.0x range at YE19, the ratio includes the IFRS 16 lease liabilities), plus its stable and prudent financial policy, including limited shareholder distribution as most earnings are reinvested to support growth. Over the past 10 years the group has consistently met its conservative guidance regarding debt ratios (including a maximum net reported leverage of 2.50x; it stood within a 1.00-1.50x range at YE17). Our rating takes into consideration some effects from coronavirus for which we have assumed a 15% decline in revenues and some deterioration in margin. We remain comfortable that under such a scenario Sonepar will remain resilient, benefiting from sound geographical diversification, contra-cyclical working capital, and sound liquidity underpinned by c. €1.6bn of committed RCF with medium-term maturity.
While Sonepar has built substantial financial flexibility and M&A is clearly a key component of its development strategy, which could periodically lead to some releveraging, we are reassured by Sonepar’s good track record for integrating companies and adhering to its disciplined financial policy.
Nearly all financing, mostly denominated in EUR and USD, has been raised at the level of parent company Sonepar S.A.S.
At YE19, 40% of outstanding debt consisted of (i) on-balance sheet factoring and securitization programs (there is no off-balance sheet program), plus (ii) IFRS 16 lease liabilities. The remaining debt included private placements, term loans, and drawn commercial paper backed by committed RCF facilities. The group has access to €1.6bn of undrawn committed revolving credit facilities.
Excellent liquidity profile
The liquidity profile is excellent. This is driven by the significant amount of cash on balance sheet, large undrawn committed credit lines, the long-term debt maturity profile, and our expectation that Sonepar will continue to generate strong free cash flow after dividends.
Credit outlook: Negative
Our Negative outlook reflects our expectation that credit metrics will slightly deteriorate over the next twelve months on the back of coronavirus impact. We expect adjusted leverage to peak in FY20 – but at only a moderately higher level thanks to a contra-cyclical working capital variation - and to progressively decrease in the following years. We expect leverage to remain within the company guidance. Our forecast assumes a 15% decrease in revenues for 2020 which would correspond to broadly 1.8 months of revenues.
- Sonepar is positioned in the SR1 category. An upgrade to SR0 could be considered if one or several key rating factors improved markedly on a sustainable basis, such as greater scale and business diversification, increased operating margins and cash generation, and/or lower leverage (eg improved FFO/debt and debt/EBITDAR ratios).
- At this stage, a downgrade to SR2 is unlikely, barring a greater than expected coronavirus impact. It could result from a significant deterioration of the financial risk profile, such as rising leverage due to large debt-funded M&A and/or a contraction in margins/free cash flow.
Initiation report: No.
Rating initiation: SR1 on 4 June 2018.
Last rating action: Affirmed at SR1 on 3 June 2019
Rating nature: Solicited short-term public rating (the rating report was published after having been reviewed by the issuer).
Name of the rating committee chair: Marc Pierron, Senior Credit Analyst.
Material sources used to support the rating decision:
- Financial statements 2019, 2018, 2017, 2016, 2015
- Discussions with Sonepar management, presentation of its strategic plan
Limitation of the Rating action:
Qivalio believes the quality and quantity of information available on the rated entity is sufficient to provide a rating.
Qivalio has no obligation to audit or verify the accuracy of data provided.
Principal methodology used in this research available at:
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