We reaffirm our SR1 short-term rating, the second-highest grade in our rating scale, for the €1.75bn NEU CP instrument of Sodexo Finance DAC. Sodexo S.A. is guarantor of the NEU CP instruments issued by Sodexo Finance DAC.
Founded in 1966, Sodexo is a France-based provider of food services and facility management services to various end-markets (i.e., Education, Corporate Services, Healthcare, Sports & Leisure). The group is one of the leading global companies in its sector and is relatively well-diversified in terms of geographic mix, with an operating presence across 64 countries. Sodexo is listed on Euronext Paris with a market capitalization of €12.6bn as of May 7th 2021. It is controlled by the family-owned holding Bellon SA (42.8% of Sodexo shares and 57.1% of the voting rights as of end-August 2020).
Our reaffirmation of the SR1 rating reflects Sodexo’s large scale, global market presence, and benefit from diversified activities (from food services to facility management services) deployed to various end-markets (i.e., Education, Corporate Services, Healthcare, Sports & Leisure) which we see as strong competitive advantages compared to local, smaller rivals, enabling it to offer diverse integrated services in many countries. We believe that the dominant position of its businesses and an adaptation of its services will ensure a gradual recovery of Sodexo’s financial performance as the economic and health conditions normalize. We also value the group’s credit profile, which benefits from a prudent financial policy, along with the satisfactory recovery expected from cash generation and only moderate indebtedness. At the end of February 2021, Sodexo’s net adjusted leverage ratio (Qivalio’s net adjusted debt/EBITDA) stood at 23.4x, compared to 2.5x for the LTM February 2020. This extreme increase in adjusted leverage was mainly due to a very low level of the Qivalio adjusted EBITDA generated during the last twelve months (€166m versus €1.8bn on a yoy basis). However, we consider that this temporarily very high ratio does not, in any way, reflect Sodexo's credit quality. Indeed, we expect adjusted net leverage to be much lower at the end of August 2021, at around 4.2x, followed by gradual deleveraging towards pre-pandemic level as EBITDA normalizes.
The group’s performance has been strongly impacted by the Covid-19 pandemic. Indeed, Sodexo sales for the twelve months to end-February 2021 were, at €16.3bn, down by 28% (versus €22.6bn over the same period a year ago). The impacts of the Covid-19 pandemic were heterogeneous over the different business units of the group. Sodexo’s most affected divisions were Education, Business & Administration (B&A), and Benefits & Rewards Services (BRS), with sales down 41%, 31% and 24% yoy respectively for the LTM ending February 2021. On the other hand, the Healthcare division proved to be more resilient, decreasing by only 11% over the last twelve months. Sodexo's revenue generation has improved on a half-year comparison basis, as emphasized by the 12.6% increase of revenue, from €7.6bn in 2H20 (ending in August 2020) to €8.6bn in 1H21 (ending in February 2021). Despite this improvement, these revenues levels remain far from pre-pandemic levels, with €11.7bn generated in 1H20, which was the best semester achieved so far by Sodexo.
On the EBITDA side, Sodexo reported an LTM EBITDA (including IFRS 16) of €731m compared to €1.75bn for the same period a year earlier. The decrease in EBITDA was mainly due to the B&A and Education activities, which were the most impacted divisions and also have the greater operating leverages. Sodexo’s operating margins have fluctuated from semester to semester, from +5.5% in 1H20 to -1.7% in 2H20 and then to +2.9% at 1H21 at constant rates, as disclosed by the company. The 1H21 result was made possible thanks to the slight improvement of the economic environment and the group’s adaptation to the sanitary measures. In addition, the group has undertaken a strict control over its revenues and its operating costs through contract renegotiations and also benefited from the first results of the restructuring program. Indeed, Sodexo announced on October 2020 a reduction of 7% of its workforce (i.e., 2,083 positions) within Sodexo France which concerns mostly employees from the Corporate Services segment. Despite the impact of the Covid-19 pandemic and the particularly difficult last twelve months, LTM free cash-flow was positive amounting to €259m, no dividends were paid during the last twelve months. Please note that FCF benefited from the continued government support (VAT, tax, social charges deferrals) for a total amount of €62m, which is by its nature a non-recurring element. This resulted in a slight decrease of net adjusted debt (€3.9bn in February 2021 versus €4.1bn in August 2020).
In order to preserve cash and credit metrics, management announced at the beginning of the Covid-19 crisis, in April 2020, the postponement of CapEx that it is not essential to run its business as well as all M&A. We understand that the cost reduction policy is still in place. In addition to this, the group has taken measures to optimize its financial conditions and ensure good liquidity. Indeed, in July 2020, Sodexo repaid its $1.6bn (equivalent to €1.4bn) USPP debt through a make-whole cost of €150m, which was financed through two bond issues (in April and July 2020) raising a total amount of €2.5bn. It enabled the group to significantly decrease its annualized average cost of debt to 1.7% in 1H21, vs. 2.0% in FY20, which represents approximatively €40m of interest cost reduction on an annual basis.
The improvement of the situation with respect to the Covid-19 pandemic will lead to an amelioration of Sodexo’s credit metrics in the quarters ahead. Even if some end-markets will not immediately come back to a normalized level, we believe that Sodexo’s operating earnings will gradually recover thanks to the gradual easing of sanitary measures and the company’s continued adaptation of its operations. Along with cash preservation measures, we estimate that operating recovery will drive the group’s credit metrics back to levels seen prior to Covid-19, provided that health situation improves in a sustainable manner.
In April 2020, Sodexo SA issued €700m bonds due 2025 with a coupon of 0.785% and €800m bonds due 2029 at 1.12%.
In July 2020, Sodexo SA issued a bond structured in two tranches, a €500m tranche due in January 2024 with a coupon of 0.5% and a €500m tranche due in July 2028 at 1.0%. The proceeds of this bond were used to repay its $1.6bn USPP debt. As a result of this operation, Sodexo’s debt is no longer subject to compliance with any financial covenant and the company has substantially reduced its interest costs.
In April 2021, Sodexo completed its inaugural US dollar bond issue, structured in two tranches for a total of $1.25bn: $500m due April 2026 with a coupon of 1.634% and $750m due April 2031 with a coupon of 2.718%. This bond issue makes a lot of sense given that 40% of the group's activities are denominated in US dollars. Indeed, following the reimbursement of the USPP in July 2020 there was a certain imbalance in the financial structure, which was fully denominated in euros excluding the undrawn syndicated multicurrency credit facilities, a portion of which is denominated in US dollars.
Indeed, as of end-February 2021, Sodexo had access to multicurrency credit facilities for a total of €1.9bn (which were all undrawn. The main maturity of these facilities (amounting to €1.2bn) will occur only in July 2025, which means a strong liquidity position for Sodexo. Please also note that during the pandemic, Sodexo did not need to resort to the “Prêt Garanti par l’Etat” (PGE). The group’s reported gross financial debt is made up of bonds with maturities ranging from 2022 to 2029 and stood at €5.0bn at the end of February 2021, €6.1bn pro forma the USD bond issue. We adjusted the gross financial debt to include the operating leases obligations for €1.0bn, pension deficits (€360m) and restricted cash (€795m), which results in an adjusted gross debt of €7.2bn, €8.3bn after taking into account the USD bond issue.
Note that we consider financial assets related to the Benefit & Rewards Services activity amounting to €342m as cash equivalents. Also, note that the €1.75bn NEU CP instrument of Sodexo Finance DAC benefits from the independent, autonomous irrevocable and unconditional guarantee of the parent company (Sodexo SA) which run until February 28th, 2025.
Sound liquidity profile
As of end-February 2021, pro forma the US bond issue, Sodexo had €3.2bn of cash-on-hand (excluding €1.1bn of restricted cash related to the BRS activity) and a large amount of undrawn facilities (€1.9bn), which represents €5.1bn of available cash, which is more than adequate to cover its cash needs for its operations. Please note that Sodexo’s next short-term debts concern the two undrawn credit facilities, €100m in May 2021 and €150m in September 2021, which are not expected to be extended any further after their maturities. In addition to that, the group has the €600m senior bond maturing on January 2022 which has a 3-months call provision before maturity date at par value.
Credit outlook: Positive
We assess the credit outlook to Positive as we expect an improvement of Sodexo’s credit metrics due to the recovery expected with the easing of the Covid-19 pandemic. Indeed, we forecast Sodexo net leverage (Qivalio’s net adjusted debt/EBITDAR) to decrease to 4.2x by the end of August 2021 (vs. 6.0x at the end August 2020), stemming from a material improvement in operating earnings. In addition, we forecast net leverage to further decline in the following years.
Sodexo Finance DAC stands in the low range of our SR1 rating, and thus an upgrade to SR0 is unlikely in the foreseeable future. It would require a material improvement of the group’s financial metrics on a sustainable basis.
A downgrade to SR2 could be considered, if the leverage ratio remains significantly higher than the pre-Covid-19 level, such level would also impact our vision of the group's financial policy.
Initiation report: No.
Rating initiation: SR1 on 24 May 2018
Last rating action: Affirmed at SR1 on 22 May 2020
Rating nature: Solicited short-term public rating.
With rated entity or related third party participation: Yes
With access to internal documents: No
With access to management: Yes
This report was published with being reviewed by the issuer.
Ancillary services provided to the rated entity : Yes, Qivalio provides ancillary services to subsidiaries within the group. Qivalio also provides solicited public ratings to Bellon, the main owner of Sodexo. (Updated on September 29, 2021).
Name of the rating committee chair: Johann Scavone, Senior Credit Analyst.
Material sources used to support the rating decision:
- Financial statements 1H21, FY20, FY19, FY18, FY17, FY16
- Discussions with Sodexo management,
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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